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Erez Law Files Claim for YES Strategy Losses by UBS Financial Services Inc

Posted on Tuesday, July 16th, 2019 at 8:24 pm    

Yield Enhancement Strategy

Erez Law recently filed a FINRA arbitration against UBS Financial Services Inc. for Yield Enhancement Strategy (YES) program losses. Their customer alleges that UBS recommended the client invest in the YES program and suffered significant losses.

The Erez Law client, who was a longtime client of UBS Financial Services Inc., alleges in the newly filed FINRA claim that he communicated to UBS that he was approaching retirement age and generally wanted to be more conservative with his investments. The client was primarily interested in investing in high quality fixed income investments that would preserve his capital and generate a modest amount of income.

Regrettably, UBS recommended a speculative and unsuitable investment strategy which it misrepresented as a safe income generating strategy with unacceptable results.

Erez Law alleges that UBS recommended the client enroll in UBS’s high risk and unsuitable YES strategy. UBS was targeting high net worth investors to sell its lucrative and fatally flawed strategy.

According to the claim, UBS’s YES program was represented to investors as a low risk strategy that allows investors to generate enhanced yield while reducing risk, all without requiring investors to deposit additional funds into their UBS account. UBS’s YES program involves using the equity in an investor’s UBS account to pursue a purportedly low risk options strategy involving a combination of put and call options on the S&P 500 index. UBS touted its YES program as employing a “market neutral” options strategy known as an “iron condor,” named for the strategy’s profit/loss diagram.

An iron condor strategy seeks to generate income through the sale of “out-of-the-money” put and call options contracts, while providing hedging against losses through the purchase of further out-of-the-money put and call options on the same asset to limit the investor’s downside risk. The iron condor strategy is intended to be a market neutral strategy, which means that is not a directional wager that the price of the underlying asset will increase or decrease in value, but rather the strategy seeks to profit from a relative lack of volatility in the price of the underlying asset.

In other words, the investor is wagering that the underlying asset’s price will remain within a specified trading range, allowing all of 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.) In the event the price of the underlying asset increases or decreases significantly, the purchased put or call options would provide a maximum limit to the investor’s downside risk. In the case of UBS’s YES program, the investor’s profits would also be reduced by UBS’s YES program advisory fees.

Erez Law’s client alleges that UBS made numerous representations designed to communicate the safety of the YES program including but not limited to:

  • Diversification—Because the strategy has a limited correlation with the market or a single stock position, the strategy may provide portfolio diversification.
  • Fixed Downside—Each position is fully hedged at time of implementation through purchasing protection (i.e. put options)

UBS’s marketing materials emphasized that the YES program purportedly minimized the risk of losses by providing investors with downside protection in the market volatility and that UBS would “manage risk” by hedging and actively monitoring position.

It is alleged that UBS represented to the client that the YES program was a great investment vehicle that would allow the client to generate increased returns with “de minimis” downside risk, all while requiring no additional investment of capital. In fact, it is alleged that UBS represented to the client that even in the event of unfavorable market conditions, the YES program would “protect downside” and only suffer “minimal losses” of “a few thousand dollars.” Erez Law alleges that this was grossly misleading and untrue.

It is also alleged that UBS represented to the client that UBS’s YES program had “excellent risk metrics and downside protection” and would allow the client to increase his returns while at the same time reducing risk.

The YES strategy did actively engage in market timing and taking directional positions on the market and suffered significant losses as a result. One possible and most likely explanation for UBS’s motivation for recommending the YES program is the significant fees it generated for UBS. UBS received an annual investment advisory fee of 1.75%. It is alleged that UBS breached their fiduciary duty by placing their interests before those of their customer, amongst other things.

It is alleged that UBS failed to adequately disclose the significant risks associated with the YES program. UBS failed to adequately disclose that the YES program was often not a market neutral strategy. UBS failed to adequately disclose that market volatility was often not the major determinant of the YES program’s profitability. UBS failed to adequately disclose that the client was at risk of losing a significant percentage of his funds invested in the YES program

Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and 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.