Spitzer Takes On UBS

by Glen Shapiro, LawAndTax-News.com, New York

18 December 2006

New York Attorney General Eliot Spitzer’s office last week announced that it was suing leading brokerage firm, UBS Financial Services, Inc. (UBS), for allegedly defrauding thousands of its customers through its 'InsightOne' brokerage program.

The New York AG's lawsuit detailed 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.

In a statement, Spitzer's office argued that:

"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, the AG alleged that InsightOne customers paid tens of millions of dollars more in InsightOne fees than they would have paid in traditional brokerage account commissions.

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

Responding to the filing of the complaint, the brokerage announced that:

"UBS categorically denies that the program was part of a scheme to disadvantage clients, and intends to defend itself vigorously in this matter. We are disappointed that the NYAG did not review or consider relevant data that supports the firm’s position prior to filing the complaint."

"UBS is committed to clients’ individual needs. The InsightOne program was designed to satisfy those clients who sought alternatives to the industry’s traditional commission-based accounts. Fee-based brokerage, in which clients pay a fee for trading activity rather than commissions on a per trade basis, offers investors greater choice as well as a way to closely align the interests of financial advisors and clients with respect to growing the value of the brokerage account. While InsightOne is not a discount program, since the program's inception in 1999 UBS clients have saved hundreds of millions of dollars, in aggregate, over what they would have paid in full commissions."

It comcluded by observing that:

"Fee-based brokerage programs are offered by most large broker-dealers. In 2005, US investors had more than USD 268 billion in fee-based programs industry-wide. At UBS, InsightOne accounts constitute approximately 3.5 percent of the firm’s U.S. brokerage accounts."

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