Articles Posted in Options

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.

Rich, Intelisano & Katz, LLP (RIK) continues its investigation into UBS’ sale of its Yield Enhancement Strategy or the “YES” options program. Many investors around the country have filed arbitrations against UBS alleging that UBS misrepresented the risks of the options program, failed to implement appropriate risk controls, and failed to supervise the YES options program.

The Yield Enhancement Strategy is run by two UBS registered representatives, Matthew Buchsbaum and Scott Rosenberg. UBS recruited both gentlemen from Credit Suisse in 2015 when Credit Suisse closed its private wealth management business. Messrs. Buchsbaum and Rosenberg ran the YES options program at Credit Suisse for many years.

UBS allowed its financial advisors other than Messrs. Buchsbaum and Rosenberg to market and sell the YES options program to their own clients. Cases filed by aggrieved investors allege that UBS represented that its YES options program was a low-risk strategy to generate modest income. However, the program is actually a complex investment strategy that carried significant risk and caused substantial investor losses.

The so-called  “Yield Enhancement Strategy,”  or “YES,” has seen a major rise in popularity at large investment firms, especially UBS,  as a vehicle for investors  to “enhance” returns relatively safely.  “YES” has been pitched as a relatively safe way to generate enhanced returns on a consistent basis, especially when markets are flat.   Fairly stable markets have been norm for many years, until recently, making  this approach attractive  to many  investors.  However, because of this historic stability,  the inherent risks of the investment have not been widely known to investors.

As a result, because “YES” relies on stability in the market place,  when significant volatility does hit, as it has at various times in the last 18 months, particularly last December, it can cause major losses to unsuspecting investors who were not prepared for them.

The “YES” Strategy is not only risky, but exceedingly complicated, involving an exotic options play, which is difficult for all but the most sophisticated investors to understand.  YES is only appropriate for the most experienced and sophisticated investors, those with a high risk tolerance and who understand options strategies, and only when accompanied with proper and specific disclosure of all the underlying risks.  Unfortunately, it appears that this product may have been sold to many investors without proper risk disclosure who did not meet the above criteria.

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