Erez Law recently filed a FINRA arbitration against UBS Financial Services Inc. for Yield Enhancement Strategy (YES) program losses. The Erez Law clients allege that Brian Donaldson (CRD #2503258) and Frank Baldwin (CRD #1415901) recommended they invest in the YES program and in turn suffered significant investment losses.
The Erez Law clients allege the following in the newly filed FINRA claim:
The couple informed UBS, Donaldson, and Baldwin that they had a moderate risk tolerance and were not interested in high risk or speculative investments. The couple were unable to subject their savings to a high degree of risk and could not replace any lost capital.
Donaldson and Baldwin recommended a leveraged strategy to the clients in order to meet their cash flow needs. Donaldson and Baldwin recommended that the clients use their securities held at UBS Financial Services as collateral for a credit line loan and borrow funds to fund their living expenses in lieu of making withdrawals from their accounts. The clients followed their advice and in so doing accumulated a growing credit line balance that concerned the clients.
According to the claim, Donaldson proceeded to present YES as a low risk strategy that allows investors to generate enhanced modest yield of approximately 5% without requiring investors to deposit additional funds into their UBS YES account. Donaldson represented to the client that his clients were enrolling in YES, that “YES was an easy way to make $100,000 a year” and that enrolling in YES was a “no brainer.” Donaldson never alluded to YES as being high risk or a strategy in which the clients could lose their investment.
It is alleged that Donaldson and Baldwin recommended a speculative and unsuitable proprietary investment strategy with unacceptable results. The couple had no experience with options and relied completely on Donaldson and Baldwin’s recommendation and representations.
UBS was allegedly targeting high net worth investors to whom to sell its lucrative and fatally flawed strategy.
According to the claim, UBS’s YES involves using the equity in an investor’s UBS accounts as collateral to pursue a purportedly low risk options strategy involving a combination of put and call options on the S&P 500 index. UBS touted YES as employing a “market neutral” options strategy known as an “iron condor,” which 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.
Contrary to UBS’s representations, YES was not a market neutral strategy. The YES strategy actively engaged in market timing and took directional positions on the market and suffered significant losses as a result.
One possible and most likely explanation for UBS’s motivation for recommending YES is the significant fees it generated for UBS, namely an investment advisory fee of 1.75% on the mandate amount. Additionally, UBS, Donaldson and Baldwin were able to generate additional and excessive fees by selling YES to the clients and their other clients. UBS, Donaldson, and Baldwin generated fees in connection with the account(s) that served as collateral for YES and also generated a second layer of fees by recommending YES. UBS, Donaldson, and Baldwin were able to generate two revenue streams from the same assets in what may be referred to as double dipping. UBS, Donaldson, and Baldwin breached their fiduciary duty by placing their interest before those of their customers amongst other things.
According to the claim, even after the client raised serious concerns about his losses in YES and requested to terminate the investment on multiple occasions, Donaldson and Baldwin recommended that he stay invested in YES and led him to believe that the strategy would regain profitability.
It is alleged that UBS failed to adequately disclose the significant risks associated with YES. UBS failed to adequately disclose that YES was often not a market neutral strategy. UBS failed to adequately disclose that market volatility was often not the major determinant of YES’s profitability. UBS failed to adequately disclose that the clients were at risk of losing a significant percentage of the mandate allocated to YES.
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, the investor’s profits would also be reduced by the YES advisory fees.
Contrary to UBS, Donaldson, and Baldwin’s 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, 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 Donaldson and Baldwin mistakenly believed that YES was low risk, would not lose capital, and would “chip away at the credit line” in “a fairly painless way.” By failing to understand and appreciate the risks and characteristics of YES, Donaldson and Baldwin Rule 2111, requires financial advisors to perform sufficient due diligence to understand the investments they recommend.
UBS made numerous representations designed to communicate the purported safety and benefits of YES 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
- Upside & Downside Protection – We prepare for unexpectedly volatile market conditions by purchasing both out-of-the-money call and put protection financed by premium generated from the sale of options
UBS’s marketing materials emphasized that YES purportedly would “manage risk” by hedging and actively monitoring positions, including:
- Actively managed investment strategy
- Uses existing bond portfolio, stock portfolio, or concentrated stock position as collateral to help generate incremental yield
- Implemented through strategic sale and purchase of out of-the-money European Style S&P 500 index options
- Call and put protection seeks to limit exposure to significant upside or downside market moves
Donaldson has been registered with UBS Financial Services Inc. in La Jolla, California since 2008.
Baldwin has been registered with UBS Financial Services Inc. in La Jolla, California since 2008. Baldwin has been the subject of one additional customer complaint, according to his CRD:
September 2020. “Time frame: Starting on or about October 2017 Allegations: Claimant’s counsel alleges unsuitability and misrepresentation with respect to recommendations to invest in and hold an options overlay strategy.” The customer is seeking $600,000 in damages in this pending complaint.
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.
"*" indicates required fields
