UBS AG was ordered by a regulator to pay nearly $11 million to settle charges it misled customers about the safety of Lehman Brothers Holdings Inc debt before that bank went bankrupt.
The Financial Industry Regulatory Authority said UBS agreed to pay a $2.5 million fine and reimburse $8.25 million to customers. UBS did not admit wrongdoing in agreeing to settle.
FINRA contended UBS and some of its brokers failed from March to June 2008 to emphasize to customers that the Lehman 100% principal-protection notes they were selling were unsecured, meaning that payment was not guaranteed.
Lehman filed for Chapter 11 protection on September 15, 2008, the largest bankruptcy in U.S. history.
FINRA said UBS failed to emphasize that the Lehman notes' principal protection feature was subject to credit risk.
It said the Swiss bank also failed to properly advise brokers how a widening of credit default swap spreads, a measure of perceived risk of owning debt, could affect Lehman's financial strength.
This matter underscores a firm's need to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors, FINRA enforcement chief Brad Bennett said in a statement.
UBS brokers did not even understand the complex products they were selling, he added.
Karina Byrne, a UBS spokeswoman, said the bank is pleased to settle the case, which concerned a limited number of investors. She said a significant majority of UBS's sales of Lehman structured products were conducted properly.
Lehman proposed a reorganization plan in January that would repay creditors roughly $60.1 billion, or about 18.6 cents on the dollar. A creditor group led by hedge fund Paulson & Co and the California Public Employees' Retirement System has proposed an alternative plan that would pay some creditors more.
(Reporting by Jonathan Stempel; editing by Steve Orlofsky and Andre Grenon)