(Adds details and quotes throughout on arbitration ruling)
By Suzanne Barlyn
April 7 A unit of UBS AG must pay $5.4 million to a former broker who said the firm misled its advisers about the financial health of Lehman Brothers Holdings Inc while recommending they sell its structured notes to clients, a securities arbitration panel ruled.
The $5.4 million includes a rare award of $1 million in punitive damages to the broker, Edward Dulin, according to a ruling late on Friday by a panel of the Financial Industry Regulatory Authority (FINRA). It also recommended erasing details about 39 arbitration complaints from Dulin's public record filed against UBS Financial Services Inc by clients who bought the notes, known as principal protected notes.
Those complaints devastated Dulin's business, said his lawyer, Rosemary Shockman, in Phoenix, Arizona.
UBS is disappointed with the decision, and believes it is "legally and factually incorrect," a spokesman said. The firm is evaluating its options, including whether to ask a court to overturn the ruling, the spokesman said.
Principal protection notes are fixed-income securities that include a bond and an option component that offers a minimum return equal to the initial investment. They are tailored for risk-averse investors.
Dulin was a major producer for UBS in Scottsdale, Arizona, bringing in $2.2 million in revenue during 2007, the year before Lehman's bankruptcy filing, according to Shockman. Dulin advised his clients to buy Lehman principal protected notes using information that UBS included in training materials and prospectuses for its brokers, Shockman said. That included telling clients that their principal was protected, she said.
But the notes plummeted in value when Lehman filed for bankruptcy on September 15, 2008. Until then, Lehman had been Wall Street's fourth-largest investment bank.
Dulin, who worked for UBS from 2000 to 2008, left voluntarily and joined Bank of America Corp's Merrill Lynch unit in 2008. But details about a mounting number of arbitration complaints stemming from the notes Dulin sold at UBS appeared on his public disclosure record and scared off clients at Merrill, Shockman said.
A Merrill Lynch spokesman declined to comment.
FINRA rules require that firms report those details on public records of brokers who facilitated the transaction at issue in an arbitration complaint, but who were not named in the case.
UBS exaggerated those details to retaliate against Dulin who refused during legal proceedings to slant descriptions of his conversations with clients in ways that would protect UBS, Shockman said.
A UBS spokesman declined additional comment.
Arbitrators wrote that they included the punitive damages award because UBS withheld material information about Lehman's "sinking financial condition" and continued to recommend selling the notes. One of the three arbitrators disagreed with the punitive damages award.
The panel, in an unusual move, also ordered UBS to pay Dulin $4 million in the event a court refuses to issue an order that confirms its recommendation to erase, or expunge, details about the 39 customer complaints from Dulin's record. Industry rules require courts to confirm expungement recommendations.
"I've never heard of anything like that before," said Tom Lewis, a securities lawyer for Stevens & Lee in Princeton, New Jersey, who was not involved in the case. "The panel stepped over the line with that. It could very well give UBS an opportunity to appeal the entire award through the court system." (Reporting by Suzanne Barlyn; Editing by Sofina Mirza-Reid and Grant McCool)