UBS Group AG (UBS) is under scrutiny over losses related to its V10 Enhanced FX Carry Strategy. The complex financial product was sold to fund managers, businesses, and individual investors and touted as a high-yielding foreign-exchange investment that employed computer algorithms to reduce risks during volatile times.
Unfortunately, according to Bloomberg, in 2010 during the start of the debt crisis, the index to which the notes were tied lost 26% over two years. Now, sources tell Bloomberg, the U.S. Department of Justice is looking at whether traders shortchanged investors by charging them too much for executing the currency trades for the strategy.
The V10 Enhanced FX Carry Strategy created sales commissions while offering an opportunity to profit from these sales and purchases of underlying currencies. Investors bought notes tied to the V10 index, which is calculated by ranking currencies from the Group of 10 nations daily according to one-month interest rates. UBS would then bet on the three highest-yielding currencies advancing and the three lowest declining. During a rise in volatility over a predetermined level, positions would be switched. Now, investigators with the DOJ are looking at instant messages, talking to traders, and examining documents issued to customers to figure out whether UBS represented how much profit it was taking on the trades.
One investor, Walter Michaelson, claims that UBS sold him the complex financial product that he never requested nor were ever properly explained to him. He said that he and UBS agreed that he would place a $1 million home-equity loan with another bank but that the paperwork was modified after he signed so that he got a business loan instead of a personal loan. This allowed UBS to take collateral assets the equivalent of five times more than his home’s value. He was required to pay back the loan by August 2010.
According to Michaelson’s complaint, the bank’s employees said the V10 notes would garner him yearly returns of 7-15% while keeping his capital preserved. When UBS contacted him to request that he invest more in V10, he found that his investment had gone up $70K. Michaelson decided to close his position and take the funds. That was when he discovered that he had lost $127,000.
Michaelson said that because of UBS-related dealings, including those involving V10, he lost $350K. Meantime, the bank says it will mount a vigorous defense against his claims. Also under scrutiny by the DOJ for a purportedly similar strategy is Barclays (BARC)
In November, UBS, JPMorgan Chase & Co. (JPM), HSBC Holdings (HSBC), Royal Bank of Scotland Plc (RBS), Bank of America Corp. (BAC), and Citigroup (C) settled with regulators for $4.43 billion for failing to stop traders from attempting to manipulate the foreign exchange market.
UBS Client Claims Losses on Currency Product Probed by US, Bloomberg, February 16, 2015
Regulators fine global banks $4.3 billion in currency investigation, Reuters, November 12, 2014
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EU Fines ICAP $17M for Helping Traders Manipulate Yen Libor, Institutional Investor Securities Blog, February 17, 2015
UBS Under Scrutiny in New Tax Evasion Probe, Institutional Investor Securities Blog, February 4, 2015