The Lehman Bankruptcy – Everyone is Getting Paid But the Victims

The Lehman Brothers bankruptcy, which was filed in September of 2008, is the largest bankruptcy in U.S. history. It has also been an unadulterated feeding frenzy for Lehman’s lawyers, consultants and others. Indeed, Reuters reported in an article on October 18, 2010 that “Lehman’s record-breaking bankruptcy has produced a staggering $1 billion dollars in fees – doled out the legions of lawyers, advisers, and bankers over the past two years.” You heard it right – $ 1 billion in fees. If that number sounds familiar, it is because it is roughly the amount of money that UBS raised for Lehman through the sale of principal protected notes (PPNs) as Lehman was circling the drain. So that leaves an interesting question – what happens to the UBS clients who purchased the billion dollars worth of PPNs?

PPN holders are not in a good place. They are unsecured creditors – the lowest level of creditor. Essentially, after all the other secured creditors get paid from what is left of Lehman’s assets, then the Bankruptcy Trustee will get around to paying unsecured creditors if and only if anything is left. When does Lehman hope to start paying back creditors? Not any time soon, and it may take months if not years to figure out who gets what.

UBS sold many of the PPNs in early 2008. That means it may take years to figure out how much, if anything, investors will get from the bankruptcy. However, if they don’t find out until 2012 or 2013, and the UBS customer decides to bring a claim against UBS, the firm will likely claim that the statute of limitations bars the customer claims. This is ironic, because UBS’s has advised many of our clients to take a “wait-and-see” approach relative to the bankruptcy, giving them a false hope of recovering their losses from the Lehman Bankruptcy Estate.

If UBS believes that its clients should wait-and-see to see what happens with the Lehman Bankruptcy, doesn’t it make sense that UBS should take the PPNs back from the customers and “wait-and-see” themselves? Sure seems fair to us. UBS should offer its customers the legal remedy of rescission – meaning that it would give its customers the principal amount of their Lehman investment back in exchange for the customer assigning its rights for any recovery in the bankruptcy to UBS. UBS is not making such offers to its customers, which provides a clear insight to the grim reality of the situation – the expectation that investors will recover little as creditors in the Lehman bankruptcy. However, investors may potentially recover their losses from UBS through FINRA arbitration.

Blum Law Group continues to file cases against broker-dealers, including UBS, for the unsuitable recommendation of complex Lehman PPNs and for failing to fully disclose the risks associated with these products when recommending it to investors. For a free consultation and to learn about your rights, please contact us.