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US Authorities Investigating UBS Client Losses in FX Product

News reports suggest that UBS could be subject to an investigation by the US Justice Department following a lawsuit claiming that the bank misled investors regarding one of its FX products.

Walter Michaelson is the individual who filed the lawsuit, in which he claims that UBS sold a product, its V10 Enhanced FX Carry Strategy, to him that he did not ask for and was misrepresented by the bank.

According to the complaint, a representative of UBS told Michaelson that the UBS V10 “guaranteed capital preservation” and that its profitability was based on euro currency volatility, both of which were known to be false claims.

Michaelson says that he requested more written information about the V10 product that was never given to him and that the UBS investment advisor, Dustin Smith, pressured him into investing in the product by warning him that he would miss the opportunity to invest if he did not do so soon and that he could lose his UBS credit facility for non-use if he did not find another suitable high yield investment product.

The complaint says that after eventually investing $1 million in the V10 product, Smith later informed Michaelson that the product was up 7%, trading at $10.70 per share. Allegedly when Michaelson grew tired of pressure to invest more in the V10 product he decided to liquidate his portfolio, satisfied with a $70,000 profit.

The court documents says that at this point Smith told Michaelson that the V10 product was actually trading at $8.73 per share, realising a loss of $127,000 from the initial investment.

Speaking with other members of UBS staff after this was disclosed, Michaelson says that further requests for written materials regarding the V10 product were ignored, that he was unable to liquidate his V10 investment and that the bank then informed him that it was pulling his credit line.

It was only months after the initial dispute started that Michaelson was able to sell his shares of UBS V10 at a substantial loss, which is why he filed a lawsuit seeking damages.

Now news outlets are claiming that the Department of Justice is investigating whether UBS overcharged customers like Michaelson when they carried out the currency trades needed to execute the V10 product strategy.

One legal expert in New York says that the continuing investigation into the alleged malpractice by bank staff in the FX market has put this asset class firmly in regulators’ sights and that it would not be surprising if the Justice Department is pursing this matter.

A spokesperson for the Department of Justice declined to comment.

galen@profit-loss.com Twitter: @Galen_Stops

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