UBS Says Investor in “Called” ETNs Can’t Arbitrate Loss
UBS Financial Services has asked a Texas court to enjoin an investor from pursuing his securities fraud arbitration claim tied to UBS leveraged exchange-traded notes because he is not a UBS customer.
UBS “committed securities fraud and made various misrepresentations,” about the notes, which are marketed as relatively conservative liquid investments but which it mandatorily redeemed amid the March market volatility, he said in his complaint.
Buckner, who identifies himself as a sophisticated investor and who represents himself in the arbitration, bought the note through his Morgan Stanley brokerage account after reading UBS’ offering materials on its websites, according to his Finra arbitration claim.
The notes were redeemed at $3.64 per share on March 19 under an accelerated schedule triggered when they fell below $5. They had an open market value of $12.35 per share two weeks earlier, he said.
In a lawsuit filed Thursday in U.S. District Court for the Western District of Texas in Austin, UBS Financial Services said Rule 12200 of FINRA’s Code of Arbitration Procedure prohibits Buckner’s complaint because he is not a UBS customer.
“[T]here is no agreement between the parties to submit disputes to arbitration or any customer relationship whatsoever creating a right to arbitrate,” UBS said.
Plaintiffs’ attorneys have been attempting to solicit fraud complaints from investors in many of the exchange-traded notes products, which are based on underlying indexes, whose value plummeted in March. Many self-directed investors will face the same legal arguments as Buckner if they try to hold UBS responsible in arbitration and are too small to fight the wirehouse in court, they say.
“Most investors would like the opportunity to bring that claim in arbitration because it’s cost and time-efficient,” said Matt Wolper, a securities fraud plaintiffs’ lawyer in Florida. “UBS is taking the position that those claims must be brought in court.”
Buckner declined to comment about whether he would consider refiling his claim against Morgan Stanley, pending resolution of the court proceeding. But his Morgan Stanley account was discretionary, he noted, and blamed his investment decisions on UBS’s disclosure material.
It “masked the true risk of these securities in incomprehensible language buried deep in supplements to offering documents,” Buckner wrote in his arbitration claim.
In marketing the unsecured debt as “senior” and “unsubordinated,” UBS gave investors the illusion that the notes were good as long as UBS remained solvent, he alleged.
A UBS spokeswoman said in an e-mailed statement: “As with any complex financial product, investing in leveraged ETNs carries risk. We provide considerable public disclosure outlining the risks and special features of our exchange-listed ETNs to enable investors to make informed investment decisions.”
UBS accelerated redemption of seven ETRACs ETNs amid the March market volatility—Buckner argued that the decision to retire other notes first created a panic in the price of the ETN he held, and lists another 27 on its website.
The securities are unsecured notes that track an index of securities and trade on stock exchanges. Many are leveraged, which can increase risk of instruments often marketed as conservative in times of heightened volatility.
“If UBS prevails, these clients will not have the opportunity to bring their claims in arbitration,” said Wolper, the plaintiffs’ lawyer. “If UBS does not prevail, I suspect there will be a floodgate of arbitration claims filed.