Articles Posted in Options

The investment fraud lawyers at Rich, Intelisano & Katz (“RIK”) won $3.2 million for their clients, Bret and Marion Pearlman, in a recent FINRA arbitration against UBS.  The Pearlmans’ claim was for misrepresentations and omissions related to UBS’s Yield Enhancement Strategy (YES) – an options overlay strategy.  It is the third largest award against UBS related to YES.  Investors have tried to a final award approximately 46 YES cases against UBS and have won roughly one-half of those cases.  RIK has tried only two cases to a final award and won the largest award ($5.2 million) and the third largest one.  In both cases, the awards reflected over 90% of the clients’ losses as of the date of the filing of the arbitration.  Read the full award here.

Options overlay strategies use underlying assets, such as equities, cash, and bonds, as collateral to buy and sell options.  In its most basic understanding, UBS’s options overlay strategy, YES, periodically bought and sold options, simultaneously, to generate income from the sale of options.  In many cases, YES was pitched and marketed to UBS customers as a “low-risk” strategy that seeks to enhance portfolios approximately 2-6% of their mandate annually (the mandate is the underlying amount of collateral the customers elect to use for the strategy).  YES was further marketed as having limited to no correlation to the S&P 500.  Additionally, in its materials and disclosures, UBS stated that the managers of the program utilized various methods to “limit” risk exposure.  In reality, YES was a high-risk strategy that added significant risk to the underlying assets where potential losses were awfully disproportionate to any potential gains.  The additional risks and potential losses were never fully disclosed to many customers.

RIK’s securities attorneys have represented many investors of YES and other complicated options strategies in legal actions against UBS and other firms.  If you have losses related to YES or options trading strategies, do not hesitate and feel free to schedule an appointment here or call us at (212) 684-0300 for a free consultation.

The investment fraud attorneys at Rich, Intelisano & Katz won a $5.2 million FINRA arbitration award for their clients, George and Sandra Schussel, in a case relating to UBS’s Yield Enhancement Strategy (“YES”).  Investors in YES, including the Schussels, suffered significant losses in December 2018.  Many investors in YES have since filed FINRA claims against UBS.  To date, over 40 of the filed claims have gone to award – approximately half have been in favor of investors while half favored UBS.  RIK has been successful in representing multiple YES investors.  The September 15, 2022 award of $5.2 million represents the largest YES-related award against UBS to date and an approximately 95% recovery for our clients.  Read the full award here.

During the Schussels’ arbitration, RIK’s attorneys stressed that recommending a strategy that the advisor did not fully understand is inherently a breach of their fiduciary duty.  After eight days of hearings, the panel unanimously awarded the Schussels over $5,200,000 including $95,000 in pre-judgment interest and $92,000 in costs.  The significant award has received the following press coverage: FA-mag, Barron’s, and InvestmentNews.

UBS’s YES strategy is an options overlay strategy which uses investors’ conservative investments as collateral for iron condor options trading.  UBS’s financial advisors marketed it as a moderate risk strategy designed to gain additional incremental investment income.  Despite UBS’s disclosure statements, UBS never adequately disclosed the true risks of YES – that it was a high risk, low reward strategy.  As such, investors in YES, including the Schussels, were shocked to discover significant losses in their YES accounts in December 2018.

Annuities are insurance contracts that make routine payments to customers either immediately or at some point in the future.  This insurance contract allows investors to protect and grow their retirement savings while providing them with guaranteed income.  Some brokers and financial advisors recommend selling or exchanging annuities for “better” investment opportunities.  However, liquidating or exchanging an annuity comes with a high price– commissions, tax implications, and the loss of benefits associated with the original annuity.  For these reasons, liquidating or exchanging an annuity without very clear financial reasons may be  unsuitable for customers.  The securities fraud lawyers at Rich, Intelisano & Katz, LLP (RIK) have recovered millions for investors who suffered from annuity-related losses.

When investors sell or exchange their annuities, it comes with a heavy price.  First, when customers sell their annuity, they are subjected to costly fees and penalties.  For example, the customer may incur surrender charges and high cancellation fees.  Second, customers will lose all benefits associated with the annuity, such as legacy protection which is a death benefit to help provide a legacy for your loved ones.  Third, the customer forfeits expected benefits from the annuity– the customer will no longer have guaranteed income.  Fourth, taxes may become immediately due on the proceeds.  Lastly, there are often high commissions associated with the sale of annuities.

Regardless of the costs and losses associated with selling or exchanging annuities, brokers and financial advisors sometimes recommend such actions to customers in order to generate commissions for themselves.  Essentially, liquidating or exchanging annuities could potentially be a scheme for your broker or advisor to take money out of your savings and put it into their pocket.  What’s worse is that the broker or advisor will use your money from the sale of the annuity to purchase another annuity or other investment products further increasing commissions and fees.  Just like with any scheme to take advantage of customers, this is ill-suited and exceedingly improper.

Many investors of UBS’s Yield Enhancement Strategy (“YES”), if not all, would never have invested in YES if UBS made full and fair disclosures related to its risks.  YES was marketed as an overlay strategy for additional incremental investment income.  Put simply, UBS advertised YES as an “iron condor” strategy that used customers’ investment accounts as collateral for options trading.  Customers that enrolled in the strategy were required to sign disclosure documents, including margin agreements and options forms.  Despite these disclosure documents, UBS never adequately disclosed the true risks of YES – that it was a high risk, low reward strategy.  Because of UBS’s failure to adequately disclose the nature of YES, investors were shocked to learn about their astronomical losses at the end of 2018, and again in early 2020.

Generally, when investors trade on margin or trade options, they are required to sign risk disclosure documents.  Enrolling in YES was no exception – as it is an options strategy that trades on margin.  However, when YES investors were opening YES accounts, some UBS financial advisors downplayed the significance of the risk disclosure forms.  For example, in several cases handled by Rich, Intelisano & Katz (“RIK”), the financial advisors dismissed the written disclosures describing them as boilerplate and/or stating that the YES portfolio manager limited risk by employing a low risk “iron condor” strategy.  Representations such as these undermine the legal effect of the risk disclosure documents.  Moreover, because the YES accounts are professionally managed, UBS and its financial advisors have a duty of full and fair disclosure regarding the investment the Firm recommends to its investors and to not mislead its customers.  See S.E.C. v. Cap. Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (“Courts have imposed on a fiduciary an affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation ‘to employ reasonable care to avoid misleading his clients.’”)  Such conduct falls well below that standard.

RIK’s lawyers have pursued several multi-million dollar arbitrations on behalf of investors to recover for losses sustained due to UBS’s YES program (read more here).  It is no surprise that UBS has attempted to shield itself from liability by hiding behind the risk disclosure forms.  Not only were the communications related to the risk disclosure documents improper, but the disclosure documents themselves were entirely deficient because they contained a number of ambiguous, contradictory, and misleading statements concerning risk that further undermine the disclosures’ purported legal effect.  For instance, in addition to generically disclosing risks, the disclosure documents also state specifically how risks associated with YES were mitigated or limited.  These mitigation statements give investors a false impression that the strategy is protected from the high risks described in the “boilerplate” disclosure documents.

Hundreds of investors have been duped by UBS’s Yield Enhancement Strategy (YES).  In its marketing materials, UBS told investors that its YES strategy was an Iron Condor, a generally low risk options “overlay” strategy designed to generate incremental income on top of that generated from a customer’s other investment assets.  Losses from such a strategy are supposed to be strictly defined and limited. However, UBS’s YES strategy was not the low risk Iron Condor strategy described to its customers by UBS financial advisors and in UBS marketing materials.  In fact, the way UBS implemented YES resulted in potential losses that far outweighed any potential gain.  Had UBS made full and fair disclosure of the true risks associated with its YES program, most UBS customers, if not all, particularly conservative ones, would likely never have enrolled in the strategy.  Unfortunately, many customers, unaware of the true risks, invested in YES and experienced severe losses in late 2018, early 2019 and 2020 when the S&P dropped.  RIK’s investment lawyers are pursuing multimillion-dollar FINRA arbitrations on behalf of investors against UBS to recover losses sustained from the YES strategy.

What Is an Iron Condor?

An Iron Condor is an options trading strategy that consists of simultaneously buying and selling a four option set of S&P Index put and call options, consisting of a combination of a bear call spread and a bull put spread, both having the same expiration date.  Investors profit from this strategy when the S&P Index performs, whether up or down, within a “band” defined by the strike prices of the short options and certain breakeven points defined by the long option strike prices.  Most short options expire worthless because they tend to lose value as they approach expiration, known as “time decay.”  When this happens the buyers of the options will let the options expire unexecuted.  In that case the investor (seller) gets to keep the premiums received from the sale of the put and call options, net of the premiums paid for the long options.  This is the maximum profit.  (Read more about what an option is here).

Investors lost millions in UBS’s high-risk Yield Enhancement Strategy (“YES”).  Despite UBS’s claims that this was a low-risk strategy and that losses were protected by hedging put and call options, investors had substantial losses when the S&P dropped in 2018 and 2019.  Even with these losses, UBS brokers continued to push this strategy onto investors.  Because of market volatility in early 2020, losses ensued further, causing investors to lose millions.  RIK’s investment fraud lawyers represent several claimants in multimillion-dollar FINRA arbitrations against UBS on behalf of YES investors.

Investors who suffered losses from the YES strategy began to file claims against UBS as early as February 2019.  Due to the coronavirus, FINRA arbitrations were conducted by videoconference for most of 2020 and 2021 (read more about FINRA Arbitrations During the Covid-19 Pandemic here).  As a result, several YES investors had their arbitration hearings held remotely.  Holding a remote hearing presents a variety of challenges and hurdles for investors.  Three of the most significant difficulties for a claimant to overcome in a remote hearing are gaining credibility with the arbitrators, earning sympathy, and conducting an effective cross examination of respondent witnesses.

Credibility is based on the competence of the witness and determines whether their testimony is worthy of belief.  In many cases, once the panel decides which witnesses are credible and which are not, the question of right and wrong is easily reached.  Panels determine credibility, in part, by observing and examining how witnesses and attorneys react to a lawyer’s questioning.  When a hearing is conducted through a two-dimensional platform, like videoconferencing, the ability to effectively and fully observe witness and attorney reactions is lost.

Although some registered representatives and financial firms downplay the risks involved with options trading, in reality, options trading can be an aggressive strategy that may entail high risks.  Because of the risks associated with option trading, it is generally only suitable for investors with a high net worth, experience, and an appetite for risk.  Brokers, financial advisors, and financial firms sometimes ignore a customer’s tolerance for risk and improperly approve options trading in the customer’s account.  Unfortunately, this can lead to tremendous losses in their accounts.  RIK recently filed several multi-million-dollar cases on behalf of investors to recover for losses relating to improper options trading.

Options are contracts that grant an investor the right, but not obligation, to buy or sell an underlying asset at a set price on or before a specific date.  Options trading has become popular amongst investors in recent years.  To be successful, options trading requires research, discipline, and constant market monitoring.  This type of trading involves high risk and requires special approval from the financial firm.

From the outset, options trading often comes with excessive fees which incentivizes brokers and advisors to recommend options trading to their clients regardless of the clients’ investment objectives and willingness to take on risk.  In doing so, the broker or advisor sometimes downplays the risks associated with an options trading strategy by claiming that the only potential downside is the initial cost of the contract or that the advisor can hedge the position.  Both notions can be misleading.  First, the investor pays a premium for options in addition to paying high commission fees.  This means the investor is at a loss the moment an option is purchased.  Secondly, hedging options is highly dependent on market conditions and is an extremely risky strategy in the current volatile market.

In recent years, options trading has become more popular with investors.  Because of the high risks associated with options trading, FINRA imposes specific rules and guidelines relating to trading options and which accounts can be approved for options trading.  For example, firms are required to have an options principal oversee option trading in accounts.  Moreover, in April 2021, FINRA sent a notice to members reminding them that, “[r]egardless of whether the account is self-directed or options are being recommended, members must perform due diligence on the customer and collect information about the customer to support a determination that options trading is appropriate for the customer.”  See FINRA, Notice to Members 21-15 (2021).

FINRA’s recent investigations and sanctions against financial institutions, brokers, and advisors for options-related violations demonstrate how serious rules relating to options approval and option trading are.  For example, last month FINRA imposed its largest financial penalty ever against Robinhood Financial LLC, in part, for failing to exercise due diligence before approving investors for options trading in self-directed accounts.  Below are other recent examples of options-related sanctions FINRA imposed on firms and individuals:

  • Cambridge Research, Inc. was censured, fined $400,000, and ordered to pay over $3,000,000 in restitutions for improper conduct relating to the firms “risky strategies” that relied on purchasing uncovered options – options where the seller does not hold the underlying stock and is required to have an option margin to show the ability to purchase the stock when needed (FINRA Case No. 2018056443801);

Over the past several years, there has be an increasing number of registered investment advisors and financial advisors using omnibus accounts.  In short, an omnibus account allows an advisor to trade the same securities on behalf of multiple clients, while typically identifying in advance which trades are intended for which client accounts.  However, in some cases, trades are allocated after they are made.  This creates an increased risk of fraud since some firms’ supervisory failures have allowed advisors to “cherry-pick” which accounts get the winning trades, and which accounts suffer losses.  The securities fraud lawyers at Rich, Intelisano & Katz, LLP (RIK) won multiple claims against broker-dealers for allowing third parties to engage in this misconduct.

An omnibus account is intended to facilitate large purchase blocks of securities for multiple client accounts.  The idea of aggregating or bunching purchases in a single transaction is to obtain more favorable prices, lower brokerage commissions, and create more efficient execution.  After the trades are made, the advisor is supposed to allocate the trades to client accounts in accordance with the previously approved allocations.  The allocations of trades then should be reviewed by compliance and/or risk management periodically to ensure that accounts are not systematically disadvantaged by this policy.

Unfortunately, some advisors use this policy to scam their clients.  Sometimes allocation instructions are submitted after trades are executed, when the adviser has had the opportunity to view the performance of the trade over the course of the day.  By reviewing trade performance first, the advisor knows which trades are profitable and which are unprofitable, then can “cherry-pick” – that is to allocate the profitable trades to favored accounts and allocate losing trades to other disfavored accounts.

Rich, Intelisano & Katz, LLP (RIK) filed a $3 million FINRA arbitration this month on behalf of clients that invested in UBS Financial Services, Inc.’s Yield Enhancement Strategy (YES).  UBS claimed the YES Program had minimal risk, but unbeknownst to its customers, the risks of this options trading strategy significantly outweighed any potential gain.  Unfortunately, investors around the world lost hundreds of millions of dollars investing in YES.

Although UBS and its brokers claimed the YES Program had limited risk of loss, in actuality, this was a high-risk strategy.  UBS implemented the YES Program beginning in 2016 after it recruited a high-profile team of brokers from Credit Suisse with massive up front bonuses.   To entice customers to invest, UBS represented that the YES Program was a low-risk way to generate incremental income of 3% to 6% annually (before the deduction of fees).  UBS further stated that the Program used protective options trading combinations to create a market-neutral strategy, meaning the Program’s performance would have little correlation to the markets, thereby protecting investors from significant losses.  These low-risk and loss protection statements made by UBS contradict the actual risks associated with the Program.

The fact is that the YES Program was a high-risk, complex options strategy that subjected UBS customers to significant market exposure and risk of loss.  This complex options strategy involved hundreds of combinations of puts and calls.  The complexity of the program and the lack of adequate risk controls exposed YES investors to significant risk of loss – loss that was far beyond the alleged risk protection.  Specifically, YES investors were exposed to 15% to 40% of losses depending on their holding period, even though their expected annual income was only 3% to 6%.  In sum, YES was not the low-risk, market neutral, downside protection strategy that UBS had stressed to its customers.

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