By Chris Vernon
The 2,200 page Lehman Bankruptcy Examiner’s Report issued in March is another nail in the UBS coffin in FINRA arbitrations involving Lehman principal protected notes and other Lehman structured notes. Although the Lehman Report deals with a lot of complex transactions and related terminology such as “counterparties” and “Repo 105,” at its core, it reveals additional wrongdoing by UBS that is both simple and disturbing.
Specifically, the Lehman Bankruptcy Report reveals that for much of the time that UBS was convincing its own clients to loan money to Lehman through Lehman principal protected notes and other structured products, UBS itself was loaning money to Lehman on far safer and far more profitable terms than the structured note loans.1 UBS was able to negotiate these favorable loans for its own benefit because it was well aware of and taking advantage of Lehman’s desperate financial situation.
As revealed by the Lehman Report, UBS acted as a “counterparty” to the now infamous “Repo 105” transactions. Effectively, by acting as a “counterparty” to the “Repo 105” transactions, UBS was making high interest loans to Lehman on a collateralized and very short term basis.2 These loans kept Lehman’s toxic assets off the books just long enough for the company to pay off some debt, issue rosier quarterly reports in late 2007 and early 20083 and then borrow more money to buy back the toxic assets.
Acting as counterparty, UBS was making a lot of money from loaning money to Lehman despite the fact that the loans by UBS to Lehman were short term and despite the fact that UBS received collateral to repay the loan in the event that Lehman defaulted. This arrangement is in stark contrast to the much longer term loans that UBS was simultaneously recommending that its own clients make to Lehman on a completely unsecured basis through Lehman structured notes.
UBS’s recent public statement that the Lehman Bankruptcy Report does not show that the “counterparties acted inappropriately” both highlights and misses the point in the context of UBS clients who were sold Lehman structured notes such as the Lehman principal protected notes. In contrast to the UBS public statement, the Lehman Bankruptcy Report is significant additional evidence that may lead FINRA arbitration panels to award punitive damages in favor of former UBS clients who bring claims against UBS relating to Lehman structured notes.
How outrageous was UBS’s behavior? While still selling Lehman structured notes to investors, who have retained our firm, and many others in March of 2008, UBS charged the now “desperate” Lehman a fee of $186 million on a very short term and fully collateralized multi-billion dollar loan. If this short term loan return were annualized, it would equate to a return to UBS of more than 150 percent on the loan. As one of Lehman’s own employees said in early 2008, “Everyone knows 105 is an off balance sheet mechanism so counterparties are looking for ridiculous levels” to try to squeeze Lehman.
The Vernon Healy Law Firm is now investigating whether UBS decided at some point that Lehman was in such bad shape that it should scale back on the “Repo 105” loans even though they were collateralized, short term, and lucrative. If such a scale back occurred, then an issue will be whether UBS took any similar action in 2008 to inform or protect its own structured note clients in connection with their exposure as lenders to Lehman.
Prior to the release of the 2,200 page Lehman Bankruptcy Examiner’s report in March 2010, UBS had already lost multiple FINRA arbitrations related to Lehman structured notes. Therefore, the information disclosed by the Lehman Bankruptcy report builds on an already troubling trail of Lehman red flags that were ignored by UBS, such as: Lehman’s status as the lowest rated of the investment banks; Lehman’s Archstone deal that was a disaster for the company4; Lehman’s illiquid balance sheet assets that rose 300 percent from 2006 to the first quarter of 20085; Lehman’s underwriting of more mortgage-backed securities in 2007 than any other firm, resulting in a staggering percentage of Lehman’s overall equity being tied up in risky assets; and dramatic write-downs by Lehman.
A cross section of Vernon Healy’s clients with Lehman structured note claims, including baby boomers, a teacher, a hospital employee, wealthy retirees, and a charitable foundation reveals how aggressively and indiscriminately that UBS was selling Lehman Structured notes as late as late March 2008 — after the Bear Stearns melt down that rocked Wall Street and ignited panic among Wall Street insiders. This indiscriminate sale is further evidenced by the fact that individuals from overseas, especially the U.K. are now seeking to retain Vernon Healy to assist them in pursuing UBS in connection with the sale of Lehman Structured Notes.For more information, contact:
Christopher T. Vernon, attorney at law
Susan R. Healy, attorney at law
(239) 649-5390 (239) 649-5390
Toll Free: (877) 649-5394 (877) 649-5394
1 Volume 3, page 880 footnote 3382 of the Examiners report.
2 Id. at 976
3 Id. at 875
4 Id. at 836
5 Id. at 836