In an announcement on October 13, 2015, the Securities and Exchange Commission (SEC) announced that UBS agreed to settle charges by the SEC alleging that UBS made false or misleading statements and omissions to investors regarding structured notes involving a proprietary foreign exchange trading strategy.
UBS is one of the world’s largest issuers of structured notes, and the case becomes the first for the SEC involving misstatements and omissions from the issuer of structured notes. Every year, structured notes registered with the SEC can equal anywhere between $40 and $50 billion. This case shows how important it is to be fully transparent when offering materials used in the process of offering and selling structured notes to investors.
According to the SEC, UBS determined that investors looking to diversify their portfolios after the financial crisis would be more willing to invest in structured products as long as there was transparency within the underlying trading strategy. The allegations state that from December 2009 to November 2010, there were an estimated 1,900 investors in the United States who bought roughly $190 million of structured notes that were linked to a specific currency index called the V10 index. In offering publications, UBS allegedly depicted the V10 index as “transparent.” The SEC alleged that UBS lacked effective policies and procedures to ensure the V10 index was in fact transparent, systematic, and not engaging in any unauthorized practices.
It turns out, the SEC alleged, that UBS employees were engaging in hedging practices that had or could have had a negative impact on the price inputs used to calculate the V10 index. According to the SEC, unjustified markups by UBS employees led to inconsistent calculations of the market price and the V10 index. The V10 index was allegedly depressed by about 5%, resulting in about $5.5 million in investor losses.
UBS agreed to a cease and desist order, to pay $11.5 million in prejudgment and disgorgement interests, to pay $5.5 million to V10 investors in order to compensate for the losses, and to pay $8 million as a civil monetary penalty.