The Investor’s Watchdog

The Investor's Watchdog

UBS Yield Enhancement Strategy (“YES”) Lawsuit

Tuesday, October 22, 2019

A popular investment strategy among large investment firms is the “yield enhancement strategy,” or “YES” strategy. UBS clients thought they were investing in a safe options portfolio, when this was far from the case. Investment products bought and sold under YES strategies are extremely complex and risky. UBS investors in the strategy suffered significant financial losses.

The way the program was structured, it would allow the managers to buy and sell both calls and puts all at once, and in doing so, you hedge the downside risk of all four investors. This type of investing strategy is called the “Iron Condor”. In an iron condor, a trader uses four different options contracts with the same expiration date but different exercise prices, usually for an index Traders create two spreads by simultaneously selling calls and put to generate income, or premium, and buying calls and puts to hedge risk and contain potential losses. As long as the price stays within the breakeven points created by the spreads, you make money. An option is an asset that can disappear into thin air. Unlike a corporate stock, which represents an ownership interest in a company that you own until you sell, an option is a time-limited asset that only exists on paper. When you buy an option, you are buying the right to buy a stock (or other security) if it reaches a certain price. If the stock reaches this “strike price,” this does not mean that you own it – you still have to buy the stock in a subsequent transaction. Conversely, if the stock does not reach its strike price, then the option expires, or simply goes away. Because there is a hedge, it allows you to invest with a neutral bias, with a high probability of success, but as previously mentioned, if the downturn is evident there is a high loss potential possible. With the trading of options, there is almost unlimited risk. In either case, before large losses occurred, there are steps that could have been taken to ensure the clients’ accounts did not suffer.

UBS was not the only firm allowing this type of investment strategy, and it has taken place for many years. The problem only comes about when market volatility is present. In this case, UBS puts the blame on the poor performance of the market in December of 2018. It appears as if, the program that they deemed to be “safe”, failed to protect the clients when there was a downturn. In just one month, the strategy had losses of more than 13%.  According to one source, of the more than 1,500 clients invested in the strategy at the time, “fewer than 100” have filed complaints with FINRA. Some are seeking damages as high as $1 million. At least five disputes are labeled pending, meaning actions or allegations have not been resolved or proven, and all the others have been denied unilaterally by the brokerage. Another source reports that nearly $5 to $6 billion was exposed to the YES program and losses could exceed $750 million. For individual investors who have lost money in yield enhancement strategy investments, financial compensation may be available through the process of FINRA arbitration. The Financial Industry Regulatory Authority (FINRA) has oversight over all major brokerage firms operating in the United States (including UBS Financial Services, Credit Suisse, Merrill Lynch and Morgan Stanley), and these firms are required to arbitrate loss claims filed by individual investors.

The attorneys at ChapmanAlbin have helped hundreds of investors recover millions of dollars in money lost due to investment misconduct. If you invested and lost money, you may be able to recover from your brokerage firm. Call us today at 1-877-410-8172 for a free consultation.

Author: Philip Vujanov

Philip Vujanov is an associate attorney at ChapmanAlbin. He represents investors nationwide before the Financial Industry Regulatory Authority in arbitration and is an active member of the Public Investors Arbitration Bar Association.

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