Swiss bank UBS Group AG (NYSE: UBS), (SWX: UBSG), (DE: 0UB), (BMV: UBSN) has agreed to settle fraud charges by paying $25 million. The Securities and Exchange Commission (SEC) had charged the company for selling high-risk option products that caused tens of millions of dollars of losses to its customers.
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UBS stock dropped 3.2% on the news before ending the day nearly 1% down at $16.22 on June 30.
As per a WSJ report, the bank sold these complex options products under its Yield Enhancement Strategy (YES) to around 600 clients between February 2016 and February 2017. The SEC said that UBS advisors pitched the products as relatively low risk as the bank did not give them complete details about the risk of significant losses that could arise from market volatility.
In 2018, in just a month, investments under YES had lost over 13% and ended the year 18% down. By mid-2019, UBS clients had lost at least $60 million on their YES investments.
About YES
YES is a complex strategy involving the sale of multiple short-term calls and puts on the S&P 500 (SPX) index which could generate higher returns when the market is stable and interest rates are low. However, these bets could turn sour if the market becomes volatile.
Credit Suisse Group AG (NYSE: CS) launched the YES strategy initially. However, the company closed its U.S. wealth management arm in 2015, following which the YES team moved to UBS.
According to the SEC, advisors and clients from Credit Suisse knew about the material risks involved in the strategy, but UBS advisors and clients were not informed about the same.
Per the WSJ report, UBS has agreed to pay $7.2 million in disgorgement and interest as well as a civil penalty of $17.4 million.
UBS said it corrected the problem in early 2017, improved its risk control measures and enhanced training for the YES strategy.
Price Target
The UBS stock commands a Strong Buy consensus rating based on 10 Buys and three Holds. UBS’s average price forecast of $23.18 implies 43% upside potential to current levels. Meanwhile, the stock has lost 8% so far this year.
Stock Analysis
According to TipRanks’ Smart Score tool, UBS Group has a score of eight, indicating that the stock is likely to outperform the market. Bloggers are bullish on the stock, and hedge funds have increased their holdings of UBS stock by 40.4 million shares in the last quarter. However, corporate insiders have sold shares worth $14.1 million in the last three months and retail investors are neutral on the stock.
Ending Thoughts
UBS’ decision to settle the fraud charges and compensate its clients could bode well ahead of its second-quarter results, which are scheduled to be released on July 26. The Street expects the company to report earnings of $0.52 per share.
