UBS must pay client $300K over controversial options overlay strategy

The first two dozen FINRA arbitration decisions involving a UBS options overlay strategy have gone slightly against the clients seeking about $200 million in combined damages.

However, at least 10 clients have received compensation after filing cases alleging that the UBS Yield Enhancement Strategy, or “YES” for short, was an unsuitable recommendation, including Claimant Cheryl E. Amyx’s Dec. 28 award for $300,000 in damages, attorney fees and costs. In an illustration of the nearly even split in the decisions thus far out of an estimated 100 claims, a panel rejected a different case and approved an expungement of it just a couple of days later.

The award providing nearly half of Amyx’s requested damages, as well as fees for her lawyer, comes as UBS has prevailed in a dozen other decisions relating to the options strategy and paid less than the amount clients have sought in the filings, the news outlet AdvisorHub reported earlier this week. Still, experts describe the strategy as a riskier version of the “iron condor” that, in the words of a 2019 report by the Securities Litigation and Consulting Group, added up to UBS “effectively claiming to arbitrage systematic mispricing in the market for short-term S&P 500 Index options.” The mixed outcomes likely reflect the variation in how much advisors and clients grasped the strategy, said Edward O’Neal, a principal with the research firm.

“You may have clients that differ in their understanding of the product itself,” O’Neal said, pointing to decisions for UBS in which arbitrators cited sophisticated investors who knew the risks involved with an options overlay strategy. “It does seem that they agree that it's a high-risk strategy, but maybe there are investors where high risk is an appropriate strategy.”

O’Neal testified as an expert in the Amyx decision handed down unanimously by a Washington, D.C.-based panel, as well a September case against UBS resulting in $921,000 in compensatory damages. He declined to discuss the details of the specific cases. In general for many clients, the high risks of an iron condor strategy aren’t appropriate or suitable, he said.

“You are hoping as an investor that the market is not moving very much in either direction,” O’Neal said. “There's always the possibility that you're going to be wiped clean by a spike in the market or a dip in the market.”

Representatives for UBS declined to comment on the cases.

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Two most recent decisions
The firm inherited the strategy when the former Credit Suisse private bank team that had launched it joined UBS in 2015. The company is fighting the wave of cases just as the last remaining claims out of an earlier and bigger group of filings against UBS over Puerto Rican bonds are reaching resolution. Client portfolios with the strategy incurred losses of 12% to 14% in December 2018, when the S&P dropped by 9.2%, according to the SLCG report. By the following October, clients of 50 brokers had already filed 48 different claims.

Amyx lodged her claim against UBS in August 2020, seeking more than $445,000 in damages based on allegations of fraud, unsuitable recommendations, negligence, breaches of contract and fiduciary duty, and other claims. The filing didn’t identify her advisor, a decorated former Marine fighter pilot and aide to the late Colin Powell named Roderick von Lipsey, as a respondent. In the hearings, neither side had “a dispute as to whether the risk was misrepresented to the client,” according to Amyx’s attorney, Scott Greco of Greco & Greco.

The main arguments from the UBS side revolved around whether von Lipsey, who Greco credits for being “truthful” in his testimony, or the team behind the strategy was to blame for the losses, Greco said.

“It was presented as a lower-risk strategy to my client and, as I understand it, to many others,” Greco said. “It was a high-risk strategy, so I think on a very basic level it was just a straight-up misinformation type case.”

Von Lipsey didn’t respond to requests for comment to The von Lipsey Team, the name of his Washington, D.C.-based practice with UBS. Just as the firm did in its statement of answer and request for expungement of Amyx’s complaint, von Lipsey denied the allegations in his own comment on BrokerCheck. His clients have filed three other pending arbitration claims seeking a combined $3.6 million in damages over the options overlay strategy, BrokerCheck shows.

“I deny any allegation of improper conduct and made no misrepresentation [to the] client of the risks and opportunities associated with the Yield Enhancement Strategy as disclosed to me by the 3rd party investment managers engaged on behalf of my client,” von Lipsey said in the comment on BrokerCheck. “I fully informed my client as to all the investments at issue and discussed the risks and suitability of the investments with my client.”

He added that he “acted in my client's best interests at all times” and that the losses were “unprecedented and beyond any possible outcome scenario presented by the investment managers.”

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A Dallas-based panel of arbitrators approved the expungement of a different UBS broker’s record in a decision just two days after the Amyx case. Two out of the three arbitrators cleared the record of UBS rep Matthew Edward Lasko and rejected the claims of David M. Farrell and Holly H. Farrell in their entirety after they had sought damages of $500,000 for their losses under the same strategy. The third arbitrator dissented without explanation.

“The investment was not unsuitable,” according to the award. “It was adequately explained to the customer. There were no misrepresentations and there were no omissions that would have changed the outcome of the case.”

The opportunity for advisors to generate more fees without bringing in any more client assets often creates opportunities for abuse, according to Greco.

“Unfortunately the customers are being told one thing about the risk, and the truth is something different,” he said. “It comes down to the amount of risk involved and the amount the customers were or weren't told about that.”