As reported by Reuters, Keesal Young & Logan (KYL) successfully defended UBS Financial Services Inc. in a recent “selling away” arbitration in Seattle, Washington.
In that arbitration, a couple who maintained investment accounts at UBS alleged that their UBS financial advisor solicited and fraudulently induced them into investing more $1 million dollars in a small, privately-owned saw mill on the Columbia River in southern Washington. The saw mill failed, and the investors sought return of more than $2.2 million invested in the mill and a subsequent mill they formed in an effort to avoid liabilities incurred in connection with the first mill. With interest and attorneys’ fees, the investors asked a panel of FINRA arbitrators to award them damages of more than $3 million. In its defense, UBS maintained that it had adequate and reasonable systems of supervision and rigorously prohibited and policed “selling away” by its financial advisors.
The panel of arbitrators agreed with UBS, ruling entirely in UBS’s favor, dismissing all claims and awarding forum fees to UBS against the investors.
“’Selling away’ cases can be problematic and very difficult to win,” noted Neal Robb, a shareholder with KYL who served as lead trial attorney in the arbitration. “Here, we were fortunate to have two key factors in our favor: exceptional UBS managers who went ‘above and beyond’ in their supervision of the sales force, and evidence suggesting the investors knew their investment was not known to UBS and conspired with their advisor to hide it from UBS.” Mr. Robb was assisted by Molly Henry, an associate in KYL’s Seattle office who was vital to developing UBS’s defense.
Facts: The case arose out of the purchase of an ownership interest in a small Oregon saw mill by Claimants Donald and Eileen Bowman. Their interest was purchased upon the recommendation of their UBS financial advisor. Their advisor was also an investor in the mill. Claimants had been clients of their advisor at his previous brokerage firm, and they took their brokerage accounts to UBS when he was hired by that firm. Their advisor had become involved in the mill before joining UBS. UBS had reviewed and approved the advisor’s investment in this outside business activity, but only upon strict conditions. These conditions included explicit prohibitions on the advisor involving any of his clients in this outside activity. Nevertheless, after Claimants became clients at UBS, their advisor promoted the saw mill to Claimants, and Claimants made a substantial investment in the mill, becoming principle owners, along with their advisor and others.
Claims: Claimants alleged their advisor was a fiduciary and his recommendation was improper, unreasonable, unsuitable and a breach of his fiduciary obligations. Claimants further alleged that UBS had a duty to supervise, train and monitor their advisor failed to do so. Claimants sought to recoup all of the funds they invested in the mill, additional funds invested in a successor business they started in a failed attempt to salvage their investment in the mill, and statutory interest and attorneys’ fees under the Washington State Securities Act.
Defenses: UBS alleged it acted prudently and reasonably in its initial investigation of the advisor’s request for permission to remain invested in the saw mill when he joined UBS and in monitoring his activities as a financial advisor, but Claimants and their advisor engaged in a number of deceptive strategies to avoid the possibility of timely detection by the UBS compliance system.
Award: The Panel concluded that UBS acted diligently and responsibly under all of the circumstances presented, and the “selling away” activity by claimants’ advisor was not known to UBS and was deliberately concealed from UBS by the advisor and Claimants. The Panel concluded UBS had a “robust and effective compliance system” with sufficient checks and balances to monitor any improper activity by UBS financial advisors.