Options Strategy By Andrew Welsch Jan. 11, 2022 2:14 pm ET An investor is suing UBS over alleged misrepresentations with regard to a multi-billion-dollar options investment strategy that went awry in 2018. The lawsuit comes as the company faces dozens of arbitration cases with regard to the strategy. Christian Dumontet is seeking class action status on behalf of himself and 1,500 other clients who invested approximately $5.7 billion in the firm’s Yield Enhancement Strategy, or YES, according to the lawsuit, which was filed Dec. 5 in federal court in New York. He is asking the court for damages, restitution, and disgorgement of allegedly ill-gotten gains. UBS has not yet filed a legal response to the lawsuit. The company denies the allegations, according to a UBS spokesman. “The YES strategy is an appropriate strategy for experienced, wealthy investors, with a long, successful track record. UBS disclosed all relevant risks to investors,” the spokesman said in a statement. “This new action is meritless and UBS intends to continue to defend it vigorously.” UBS FABRICE COFFRINI/AFP/Getty Images Dumontet’s lawsuit is the latest salvo in a series of legal battles over how the firm’s Yield Enhancement Strategy was presented to clients and performed. The firm is still managing the strategy on behalf of participating clients, according to a person familiar with the matter. UBS says the risks were fully disclosed. Clients’ attorneys dispute that, and say the strategy was implemented differently than advertised. “UBS promised one thing, but delivered something else,” says Jeffrey Kaplan, a Miami-based attorney at law firm Dimond Kaplan & Rothstein who is representing investors in arbitration cases against UBS. He does not represent Dumontet. A mixed bag. Of the dozens of arbitration claims filed so far, arbitrators have issued rulings in 23 cases. UBS has prevailed in 13, and lost the other 10. In some of the cases UBS has lost, arbitrators did not award clients the full amount of damages requested. Last month, a Washington, D.C.-based arbitration panel found in favor of client Cheryl E. Amyx, awarding her approximately $300,000 of the $450,000 she requested. “We’re happy with the award. It was not the entirety of what we requested, but it’s a high percentage,” says her attorney, W. Scott Greco of McLean, Virginia-based law firm Greco & Greco. In some arbitration cases, UBS has also requested arbitrators expunge client complaints from advisors’ regulatory records (client complaints are visible on BrokerCheck, a public online database maintained by industry self-regulator Finra). Arbitrators have so far granted the requests eight times, and denied them 10 times, according to copies of the arbitration awards. Arbitrators are not required to provide explanations for their rulings, and none who awarded clients monetary damages or denied expungement requests did so. Advisor Newsletter Advisor Daily A collection of our top stories from the day, delivered every evening. Stay on top of the latest advisor news, community commentary, and opinion from industry leaders. SUBSCRIBE Several arbitrators who granted expungement requests wrote that the allegations were false, and said that the clients were sophisticated investors who understood the risks associated with YES. For instance, a Nashville-based arbitration panel wrote in November that it was “totally unreasonable” for a client suing UBS to pursue damages with regard to one investment when the client’s overall portfolio grew. The panel denied the client’s request for more than $1 million in damages and ordered the complaint removed from the client’s advisors’ regulatory records. While Dumontet’s case seeks class action status, dozens more arbitration cases are moving forward. Kaplan, who does not represent Dumontet, has more than a dozen cases remaining, with arbitration hearings for one case scheduled to begin next week via Zoom on account of the pandemic. He says he finds it efficient and prefers to keep cases moving forward. “Time is not a friend to plaintiffs, in my opinion,” Kaplan says. “Memory fades, people get sick, people die. So it’s a risk.” A complex strategy. UBS clients could invest in YES using margin accounts and the strategy relied on both call and put options. It incurred substantial losses starting in December 2018, reaching approximately 20% of the $5.7 billion in the YES accounts, or approximately $1.2 billion, according to Dumontet’s lawsuit. A UBS spokesman declined to comment on the alleged losses. The company and its advisors “concealed the most material piece of information that UBS customers would have wanted to know before making an informed decision—i.e., that the expected losses during regularly occurring market conditions would dwarf the expected returns,” the lawsuit says. “YES was a money-losing account for UBS customers and none of them would have made the decision to choose a YES account and risk their existing portfolio assets had they known this fact.” Dumontet’s lawsuit says he invested in YES and suffered unspecified losses. The lawsuit does not say who his financial advisor was. Attorneys representing Dumontet did not respond to requests for comment. Four New York-based UBS advisors also named in the lawsuit—Matthew Buchsbaum, Scott Rosenberg, Gerard Costello and Sonia Attkiss—did not respond to an email requesting comment. Reached by phone, Costello referred a reporter to UBS for comment. The four advisors allegedly developed YES while employed at Credit Suisse , and brought it with them when they moved to UBS in 2015, according to the lawsuit. A spokesman for Credit Suisse declined to comment on the matter. Other advisors at UBS were also able to invest client assets in YES, according to attorneys representing clients in arbitration cases with the company. Samuel B. Edwards is an attorney who has represented clients in two arbitration cases against UBS related to YES and won both. He does not represent Dumontet. “This is an actively managed options strategy that involves a lot of moving components and parts,” says Edwards, who is with Houston-based law firm Shepherd, Smith, Edwards & Kantas. “You’re getting into delta, thetas—very few retail brokers know how that stuff works.” Write to Andrew Welsch at andrew.welsch@barrons.com
To me it seems to be the regular case of people investing in strategies they haven't bothered to understand, but here they have enough wealth to bring the big legal guns in an attempt to undo losses. Anyone with a more nuanced take?
I think the strategy was not doing what it said it would do. It was a lot more levered and didn’t have the proper tail hedges that they claimed they used. (If this is the fund I’m thinking of).