Articles Posted in UBS YES Strategy

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.

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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