UBS Hit Hard in Lehman Brothers Principal Protected Notes Arbitration

February 8, 2011, 10:30AM. By Heidi Turner

New York, NYAlthough Lehman Brothers is no more, UBS is still feeling the effects of Lehman Brothers Principal Protected Notes. The Lehman Brothers structured notes were sold by UBS and are now the focus of investor arbitrations against UBS. Although UBS says its sale of the Lehman Principal Protected Notes was by the book, so far the majority of arbitrations have gone in favor of the investors, a sign that even arbitration panels do not agree with UBS.

Late in 2010, UBS lost two large arbitration cases: one for $530,000 and a second for $2.2 million. In fact, of eight cases regarding Lehman Brothers structured notes, seven arbitrations have been found for investors, showing that arbitrators question how UBS handled the structured notes.

According to Investment News (01/23/11), UBS sold approximately $1 billion of the Lehman Principal Protected Notes to clients. Attorneys who spoke with Investment News said they have cases pending against UBS, but UBS has started settling cases before they wind up at arbitration.

Although UBS faces arbitration filings for its handling of the Lehman structured notes, so far it only faces regulatory action from one state, Investment News notes. That state, New Hampshire, alleges UBS sold the notes even after it became clear that Lehman Brothers would fail due to subprime mortgages.

The Lehman Brothers Principal Protected Notes were allegedly sold as being risk-free. Investors say they were told they would, at the very least, receive their entire investment back once the Lehman structured notes matured. What investors say they were not told was that Lehman Brothers was the sole guarantor of the notes. Furthermore, they say they were not told of the risks associated with the structured notes.

In 2008, Lehman Brothers failed, leaving the structured notes virtually worthless. Investors with money in the notes are now filing arbitrations against UBS to recover their losses. The investors allege UBS sold the structured notes even after concern about Lehman's security began.

Winning seven of eight arbitrations is unusual. According to some attorneys, in a good year claimants typically win approximately 50 percent of arbitrations filed. Furthermore, five claimants who have won an award against UBS have reportedly won 100 percent of the damages they sought, also unusual in arbitration cases.