UBS Yield Enhancement Strategy a losing option

UBS Lawsuit for YES Yield Enhancement Strategy Losses
October 22, 2019

Some leading investment advisors are in hot water over losing clients tens of millions of dollars in complex investment schemes known as Yield Enhancement Strategies (YES) or Collateral Yield Enhancement Strategies (CYES).

UBS Group AG along with Merrill Lynch, Morgan Stanley and others are all accused of selling the strategy to high net worth individuals as a low-risk add-on to existing investment portfolios when in fact the options strategies could–and did–result in heavy losses.

What is a Yield Enhancement Strategy?

As it is currently marketed to customers, YES is a way to improve investment returns with minimum risk. This is accomplished through a complex trade or series of trades involving the purchase and sale of financial derivatives known as “options.”

Options are investment contracts that are bought and sold in the financial markets. The buyer gets the right to buy or sell an underlying asset, such as stock in a company, at an agreed-to price. The seller receives a payment, known as a premium, in exchange for promising to sell or buy the underlying asset at the agreed-to price, known as the “strike price.”

While YES is an appealing marketing title, the strategy is really what traders on Wall Street know as the sale of an “iron condor” spread. While there are many intricacies to this kind of trade, it involves both the purchase and sale of options, with the sales bringing in more than the purchases cost.

This strategy is best applied to underlying assets that are not expected to change much between the sale and the expiration of the contract. If, at the time of expiration, the underlying asset has not moved much, then the investor will keep the modest gains from selling the iron condor spread. The purchases, meanwhile, are intended to protect the investor if the asset moves up or down more than expected.

Unfortunately for investors, the underlying asset in the case of the UBS YES was the S&P 500 index, which experienced large fluctuations in price in 2018. This volatility caused the iron condors sold by traders at UBS to make losses in the range of $50-60 million.

Wall Street loses money all the time, why is UBS YES the subject of litigation?

Yes, in the financial markets, for every winner there’s a loser. In the case of YES, however, due to the complexity of the product and the unique risks involved in the iron condor, investors who lost money in these schemes may be able to recover those losses by suing for investment fraud.

Investment fraud has a very broad definition that goes well beyond boiler room cons and Ponzi schemes. In the context of the UBS, Merrill Lynch, Morgan Stanley and Credit Suisse Yield Enhancements Products, it can include the following:

  • Self-interested investment advice: The purchase and sale of the options in the iron condor strategy yields fees for the firms involved whether the trades are winners or losers.
  • Unsuitable investment advice: Many individual investors are not sophisticated enough to fully understand the trades involved in YES.
  • Overconcentration of portfolio assets: Overconcentrating an investor’s portfolio in one or two risky investment strategies is considered a form of investment fraud.
  • Omission of material information: If you do not have all the information you need to make an informed investment decision about a product that a broker is trying to sell you, you may have a claim for investment fraud if you suffer losses as a result.

I lost money in a YES investment, what can I do to get my money back?

Large Wall Street firms like UBS, Morgan Stanley, Bank of America Merrill Lynch and Credit Suisse are required to arbitrate fraud claims by investors through FINRA arbitration, an alternative dispute resolution procedure that provides the best forum for timely outcomes in financial fraud cases.

The best place to start is to contact an experienced FINRA arbitration lawyer. Investors have six years to file a FINRA claim, but if large scale litigation has shown anything, it’s that the early bird gets compensation. Wait too long and there may not be anything left to recover!

UBS Lawsuits: Y.E.S. Investments Two Thumbs Down
FINRA Discipline October 2019

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