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John Maccoll was a registered representative of UBS Financial Services when he embezzled more than $3.7 million from more than a dozen customers between April 2010 and March 2018. According to charges filed by the Securities and Exchange Commission in 2018, most of his customers were elderly and retired, entrusting him with their financial well-being. He employed “high pressure sales tactics” to get them to invest in what he said was a private fund that would provide returns of at least 20%. In reality, he stole their money for his own personal expenses, using fabricated account statements to cover up his fraud and providing Ponzi-like payments to some of his customers. He eventually pleaded guilty to wire fraud and was sentenced to nine years in prison.
The $3.7 million allegedly stolen by John Maccoll represents a fraction of the losses unjustly suffered by UBS customers in recent years, often due to what regulators have deemed considerable supervisory failures. As the SEC said in one case, the firm has fallen short in its obligations to safeguard its customers’ investments.
In July 2021 the SEC ordered UBS Financial Services to pay an $8 million penalty over findings the firm failed to supervise sales of iPath S&P Short-Term Futures ETN (VXX), an exchange-traded note intended for short-term trading. The SEC, which in recent years has levied millions in fines over’ exchange-traded product recommendations, found that UBS advisors bought VXX products and held them in customer accounts for long periods, “including hundreds of accounts that held the product for over a year.” During the period in question—January 2016 to January 2018—firm rules barred brokers from soliciting customers to purchase VXX; advisors, however, were not barred from “certain” uses of the products in discretionary accounts. The SEC additionally alleged that UBS did not monitor whether representatives abided by its concentration limit for volatility-linked ETPs or take enforcement actions against representatives who didn’t.
UBS advisors ultimately held VXX ETNs for unsuitably lengthy terms in 1,882 customer accounts, according to the SEC, which found that some advisors “had a flawed understanding of the appropriate use of the volatility-linked ETP” and declined to educate themselves of the product’s risks. As a result, their customers suffered significant losses. In a statement about the order, an SEC enforcement chief said that “Advisory firms must protect clients from inappropriate investments in complex financial products.” According to an Advisor Hub report, UBS said at the time that it was “pleased to have resolved this matter related to the firm’s policies and procedures for one product in one of its discretionary trading programs between 2016 and 2018.”
When a doctor named Luis Romero Lopez invested in closed-end Puerto Rico bond funds via UBS Financial Services, the firm extended him a “non-purpose” loan of $8 million dollars to continue purchasing them. Over a six-week period in 2013, his attorney later told Advisor Hub, Lopez’s account balance plummeted from $14 million to negative $1 million. In 2017 a FINRA panel found that when UBS solicited him to take the loan to buy more bonds, it was either knowingly or indifferently violating a federal regulation establishing limits around margin loans. As a result, when the Puerto Rico bond market sustained a serious downturn, Lopez suffered greater losses than he would have if his account had been suitably leveraged. The panel ordered UBS pay him $7.9 million in compensatory damages and $1 million in punitive damages.
UBS’s Puerto Rico bond business cost the firm a pretty penny even before it was ordered to pay Luis Romero Lopez almost $9 million. In 2015 FINRA ordered the firm to pay a fine of $18.5 million in fines and restitution over unsuitable Puerto Rico closed-end bond fund transactions. The regulator found that over a period of more than four years, the firm’s Puerto Rico arm failed to supervise bond transactions. According to FINRA, it specifically neglected to monitor the leverage and concentration levels of its customers’ bond investments, and it had no supervisory system reasonably designed to detect and prevent unsuitable trades.
UBS was allegedly aware of the “unique” circumstances involved in Puerto Rico bond investments: that is, its retail customers often had high concentrations of Puerto Rico investment in their accounts, and they “often used those highly concentrated accounts as collateral for cash loans,” according to FINRA. However, the firm failed to take adequate steps to ensure those concentrations were suitable for the customers in question. As a result, when the market took a downturn in 2013, customers whom the firm had solicited to open lines of credit—collateralized by their highly concentrated accounts—were required meet maintenance calls on those lines of credit. For many, those maintenance calls resulted in substantial losses.
In a statement about the sanction, a FINRA official said: “UBS of Puerto Rico operated in a unique economy and ultimately failed to tailor its supervisory systems to its specific business needs. Despite the fact the firm was very familiar with the unusual characteristics of its retail accounts, it did not supervise these transactions properly to prevent customers’ heightened exposure to risk.” The firm was ordered to pay $7.5 million in fines and $11 million in restitution.
One year later, the SEC hit UBS with charges it failed to adequately train its salespeople to sell reverse convertible notes to retail investors, resulting in unsuitable recommendations to thousands of customers. Reverse convertible notes, or RCNs, are complex investments that do not guarantee a return of principal, and which are typically considered unsuitable for inexperienced investors. The SEC found that UBS’s failures to properly educate its representatives about the products resulted in $548 million in RC sales “to more than 8,700 relatively inexperienced retail customers.”
The regulator reached a settlement with UBS in which the firm agreed to pay over $9 million in disgorgement (with interest) and a penalty of $6 million. “When it comes to complex financial products, investors are especially dependent upon firms making sure their financial advisors comprehend the potential risks and rewards of the investments they are recommending,” said one of the SEC’s enforcement heads. “The SEC takes a dim view of firms that fall short in their obligations.”
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