Erez Law recently filed a FINRA arbitration against UBS Financial Services Inc. related to recommendations to invest in the company’s high risk and unsuitable Yield Enhancement Strategy (YES). It is alleged that UBS Financial Services Inc. was targeting high net worth investors to whom to sell its proprietary, lucrative, and fatally flawed strategy.
The customers allege that David Bishop Smith (CRD #2033396), who has been a registered representative of UBS Financial Services Inc. in Dallas, Texas since 2015, was entrusted with their securities investments since 2016.
The Erez Law client, who was a retired couple from Nevada, alleges the following in the newly filed FINRA claim:
Erez Law alleges that the inexperienced investors entrusted David Bishop Smith with the proceeds from the sale of their business, a once-in-a-lifetime event that provided them with enough money to sustain their lifestyle without undue risk; they were not interested in and did not need to invest in any high-risk investments. Regrettably, it is alleged that he recommended a speculative and unsuitable proprietary investment strategy that produced unacceptable results. Additionally, it is alleged that he presented YES as a superior investment strategy that was consistent with the couple’s risk aversion.
The Erez Law clients allege that he presented them with performance reports from other clients to demonstrate the success of the investment. However, it is alleged that he violated UBS Financial Services Inc.’s policy by using the performance report, which included the time period prior to February 2016 when YES was not offered through UBS Financial Services Inc.
It is alleged that David Bishop Smith failed to disclose to the couple that YES was a high-risk strategy and in no way communicated the accurate level of risk attendant to YES. Additionally, UBS Financial Services Inc. touted YES as employing a “market neutral” options strategy known as an “iron condor,” named for the strategy’s profit/loss diagram. This strategy enables the investor to wager that the underlying asset’s price will remain within a specified trading range, allowing all the options to expire worthless, at which point the investor retains the premiums received from the sale of the options (minus the cost of purchasing the options that were used to limit the downside exposure). The investor’s profits would also be reduced by the YES advisory fees.
According to the claim, based on his representations and recommendations, the couple agreed to invest in YES. He recommended and implemented a staggering $25 million mandate at the inception of the YES account.
Contrary to his representations, YES was a high risk and unsuitable leveraged strategy that involved significant risk of loss of principal. By recommending that the couple have an excessively large mandate in YES, it is alleged that the risk to which they were unknowingly exposed was further increased. Additionally, the size of the mandate rendered the recommendation even more unsuitable. It is alleged that David Bishop Smith violated the suitability rule by failing to adequately understand or appreciate the YES program’s significant risks.
YES is a fee-based investment advisory program whereby the firm manages the assets in the program on a discretionary basis, without the need to contact clients prior to any transactions. It is alleged that one possible and most likely motivation for UBS Financial Services Inc. advisors like David Bishop Smith to recommend YES is the significant fees it generated for advisors. UBS Financial Services Inc. and brokers shared annual investment advisory fees of 1.25% on the mandate; in the case of the couple, they paid $312,500 per year in advisory fees regardless of results.
Additionally, the complaint alleges that UBS Financial Services Inc. and the broker were able to generate additional and excessive fees by selling YES to the couple and their other clients in connection with the account(s) that served as collateral for YES; this generated a second layer of fees by recommending YES. Is it alleged that UBS Financial Services Inc. and David Bishop Smith breached their fiduciary duty by placing their interest before those of their customers amongst other things.
Perhaps one of the most egregious aspects of this case is UBS Financial Services Inc.’s alleged knowledge that YES was a failed investment and its concealment of the failure of YES from investors including the couple since November 2018.
It is alleged that he also failed to adequately disclose to the couple their rapidly growing losses in YES. Instead, he repeatedly told the couple to stop looking at their statements and that they had nothing to worry about. The complaint alleges that it was only after the couple consulted with a new financial advisor in late 2020 did they begin to understand the severity of their losses in YES as well as the risk of YES. By March 2021, the couple sustained massive losses of $4,325,573 in YES. According to the complaint, the couple then confronted Smith about their massive losses in YES, however he attempted to deflect the losses by representing to them that the loss was immaterial because they could use the losses as a tax write-off.
How to File a Claim Against David Bishop Smith
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.