Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.
Compliance December 18, 2006
Spitzer Says UBS Defrauded Clients Through Brokerage Program
In a lawsuit filed earlier this month, New York Attorney General Eliot Spitzer’s office charges UBS Financial Services, Inc. with leading inappropriate clients into its InsightOne brokerage program by falsely promoting services not offered.
Reported by Rebecca Moore
According to a December 12, 2006 news release from Spitzer’s office, UBS moved thousands of clients from regular brokerage accounts into InsightOne – a “wrap’ account charging an asset-based fee that the attorney general’s office considers inappropriate for investors who rarely trade securities or hold significant amounts of cash, no-load mutual funds, or other similar assets. UBS lured these clients into the program with false promises, such as the promise of an advice-based account, the news release said.
The lawsuit also charges UBS kept many unsuitable investors in the brokerage program by encouraging brokers to engage in additional trading in their clients’ InsightOne in order to surpass the minimum trading requirement. According to the news release, one broker wrote to a supervisor in an August 2004 e-mail regarding this practice, known as 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. CONFLICT is all over this.” Another broker explained in an e-mail to a senior manager in October 2003 that “increasing transactions for the sake of increasing transactions (not for the benefit of the client) is called churning.”
In addition, Spitzer’s office said UBS 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.
The news release said InsightOne customers paid tens of millions of dollars more in fees than they would have paid in traditional brokerage accounts as a result of UBS’ fraudulent conduct. The release included several examples of clients who paid exorbitant fees, including a 91-year old customer charged more than $35,000 for just four trades over two years – around $33,000 more than she would have paid in a traditional brokerage account.
The lawsuit charges UBS with violations of state anti-fraud laws, common law fraud and breaches of fiduciary duty, and seeks from UBS disgorgement, damages and restitution, and injunctive relief.