State Lawsuit Alleges Fraud In Ubs Brokerage Accounts

Attorney General Spitzer’s office today sued a leading brokerage firm, UBS Financial Services, Inc. (UBS), for defrauding thousands of its customers through its "InsightOne" brokerage program.

The lawsuit details a scheme by UBS to move inappropriate clients from regular brokerage accounts into InsightOne, despite that program’s far higher costs for those investors, by falsely promoting InsightOne as providing personalized advice and other financial planning services.

With InsightOne, UBS charged its brokerage customers an asset-based fee instead of per-transaction commissions. But asset-based fee (or "wrap") accounts are inappropriate for investors who rarely trade securities or hold significant amounts of cash, no-load mutual funds, or other similar assets. Rather than steering such investors away from InsightOne, UBS:

  • Lured unsuitable investors into the program with false and misleading promises, including the promise of an advice-based account. One UBS broker implored senior executives to "look at our InsightOne brochures and possibly take out the misleading information [relating to advisory services] on the cover;"

  • Created a conflict of interest for its brokers by giving them a financial incentive to enroll and keep investors in InsightOne even when the program was ill-suited for those investors;

  • Kept many unsuitable investors in InsightOne by encouraging UBS brokers to "churn" their clients’ InsightOne accounts – that is, to engage in additional trading for the purposes of surpassing the minimum trading requirement. One broker wrote to a supervisor in an August 2004 email regarding churning, "[N]ow we have to trade heavy or light to stay within guidelines to keep insight one alive …. How Wrong is that? You are not looking at the best interest of the client." The broker continued: "CONFLICT is all over this." Another broker explained to a senior manager in October 2003: "[I]ncreasing transactions in order to comply with this new policy could be detrimental to many clients, which is not something we want to do. Fee based or not, increasing transactions for the sake of increasing transactions (not for the benefit of the client) is called churning."

As a result of UBS’s fraudulent conduct, InsightOne customers paid tens of millions of dollars more in InsightOne fees than they would have paid in traditional brokerage account commissions. For example:

  • UBS charged a 91-year-old InsightOne client more than $35,000 for just four trades over two years – some $33,000 more than she would have paid in a traditional brokerage account.

  • Another InsightOne client paid approximately $24,000 in fees in 2003 for executing a single transaction.

  • A retiree with an annual income of $11,000 and $56,000 in her InsightOne account paid a fee of $1,250 in 2003 – more than 10% of her annual income – despite trading only twice during the year.

  • An 83-year-old investor who had previously made only four trades over two years in her traditional brokerage account, was nonetheless enrolled in InsightOne, where she proceeded to make only four trades over three years, at a cost of $4,300 per trade. In all, she spent almost 8% of her annual income on trading.

  • A farming couple made two trades over three years in InsightOne and were charged more than $23,000 per trade, paying some $46,000 more than they would have paid in a traditional account. These fees represented more than 20% of the couple’s annual income.

The Attorney General’s civil lawsuit was filed today in New York Supreme Court in Manhattan. The lawsuit charges UBS with violations of state anti-fraud laws, as well as common law fraud and breaches of fiduciary duty. The complaint seeks from UBS disgorgement, damages and restitution, as well as injunctive relief.

The Attorney General's case is being handled by Assistant Attorneys General Andrew Lorin, Zachary Sturges and Patrick Findlay, with assistance provided by Economist Hampton Finer, under the supervision of David Brown IV, Chief of the Investment Protection Bureau.

Attachments:

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