Erez Law is investigating claims for investor losses in the UBS Willow Fund, LLC, a closed-end investment fund sponsored and sold by UBS. The UBS Willow Fund specialized in distressed debt instruments, and had assets of almost $500 million in 2006. In the first three quarters of 2012, however, the UBS Willow Fund lost almost 80% of it value, and then in October 2012 announced that it would be liquidated. Investors in the UBS Willow Fund are likely to receive pennies on the dollar for their investment.
The UBS Willow Fund began to experience dramatic losses after its longtime manager switched the Fund’s focus from corporate debt to derivative trades, as described in a New York Times article. As shown by the Fund’s SEC filings, the Fund returned almost 25 percent on a portfolio of corporate bonds, bank loans and corporate repurchase agreements, a financing arrangement. Credit default swaps amounted to a mere 0.18 percent of the 2006 portfolio. Thereafter, however, credit default swaps grew exponentially to 2.6% in 2007, 24.97% in 2008, and 42.86% in 2009. At the same time, the Fund’s losses also grew, and by 2009, the Fund had $106 million in unrealized losses on credit default swaps.
Credit default swaps are insurance-like contracts that promise to cover losses on certain securities (such as municipal bonds, corporate debt, or mortgage-backed securities) in the event of a default. The buyer of the credit default contract pays premiums over a period of time in exchange for knowing that losses will be covered if a default happens. Credit default swaps, however, are unregulated. As a result, contracts can be traded from investor to investor without any oversight into whether the buyer has the resources to cover a loss if the security defaults. Investors who invest in credit default swaps essentially place a bet on whether the underlying investments will fail or succeed.
A spokeswoman for UBS said of the Willow Fund: “This fund was a specialized, speculative investment sold only to sophisticated and experienced investors who represented that they understood the fund’s substantial risks. Investors were kept informed of the fund’s investments, including in credit default swaps, and the performance of the fund. While we regret the recent losses, investors were clearly informed that these types of investments have substantial risks,” according to the New York Times.
Contrary to UBS’ assertion, some brokers may have represented the UBS Willow Fund as a safe fixed income investment with minimal risk. Further, the UBS Willow Fund may have made inadequate disclosures to investors about the nature and risk of the Fund.
Investors in the UBS Willow Fund filed a class action complaint federal court in New York against the Willow Fund’s managers in December 2012. Class action lawsuits are court proceedings intended to recover damages for a group or “class” of investors who sustained losses from the same cause. Class action litigation can be extensive and expensive.
The class action filing, however, does not preclude investors from pursuing individual securities arbitration claims. A securities arbitration claim is filed with the Financial Regulatory Authority (“FINRA”), which is responsible for resolving disputes between investors and brokerage firms. FINRA has established rules and regulations regarding firms’ rights and responsibilities with respect to the handling of investor accounts. An individual securities arbitration claim typically focuses upon sales practice violations and is based on facts specific to the handling of an individual investor’s account given the investor’s objectives, financial wherewithal, and risk tolerance. Securities arbitrators consider not only what the firm said to its customers in general about certain investments, but also what the individual broker said – or failed to say – to a specific investor about various investments. This focus on the individual investor is not only a key distinction from a class action, but also a distinct advantage.
If you invested in the UBS Willow Fund and suffered investment losses, please contact Erez Law to explore your legal options. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies. To learn more, please call us at 888-840-1571 or complete our “contact form.”