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UBS Fined $19.5 Million By SEC Over V10 Currency Index with Volatility Cap False Statements

The Securities and Exchange Commission issued a press release stating that UBS AG (UBS) has agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to investors in structured notes with a foreign exchange trading strategy. UBS agreed to settle the SEC’s charges that it misled investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a “transparent” and “systematic” currency trading strategy using “market prices” to calculate the index. In fact, the SEC found that there was undisclosed hedging trades made by UBS that reduced the index price by about five percent. Thus, statements that market prices and transparency were used in the process were misleading.

The SEC stated that structured notes are complex financial products that typically consists of a debt security with a derivative tied to the performance of other securities, commodities, currencies, or proprietary indices. The return an investor receives on a structured note is linked to the performance of the derivative over the prescribed life of the note. Every year between $40 billion to $50 billion of structure notes are registered with the SEC and many of these notes are sold to unsophisticated retail investors.

Andrew Ceresney, Director of the SEC's Division of Enforcement stated that the agency “will remain focused on protecting investors who are not in a position to protect themselves by virtue of their limited access to information, the complexity of the product, or both.”

Specifically, SEC’s order found that UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products. In registered offerings of the V10 Currency Index notes, UBS depicted the investment as “transparent” and “systematic.” Between December 2009 and November 2010 approximately 1,900 investors bought approximately $190 million of the structured notes at issue. The SEC found that UBS lacked an effective policy, procedure, or process to make investors aware that UBS employees in Switzerland were engaging in hedging practices that could have a negative impact on the price inputs used to calculate the V10 index. The SEC further determined that UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads, and traded in advance of certain hedging transactions which hurt the performance of the investment. This trading was also found to result in market prices not being used consistently to calculate the V10 index. Finally, the SEC found that UBS did not disclose that certain traders added spreads to the prices of hedging trades at their discretion. The result of the undisclosed market activity resulted in undisclosed markups and spreads on the V10 index depressing its performance by approximately five percent and causing investor losses of approximately $5.5 million.

Investors who have suffered losses may be able recover their losses through securities arbitration. The investment attorneys at Gana Weinstein LLP are experienced in representing investors in cases where their broker has acted inappropriately. Our consultations are free of charge and the firm is only compensated if you recover.

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