The US Financial Industry Regulatory Authority (Finra) has ordered UBS Financial Services to pay nearly $200,000 in costs and compensation following its sale of Lehman Brothers-backed notes to an individual investor.

Patricia Flanagan, from South Carolina, placed $225,000 in a Lehman Brothers-backed principal-protected note (PPN) and $75,000 in a Return Optimisation note in February 2008 via her UBS broker. Both products were left nearly worthless when the investment bank collapsed six months later. It could be a bellwether for UBS, which has $1billion exposure to Lehman structured note paper, as well as other financial institutions that sold its products.

Finra's arbitration panel ordered that UBS must compensate Flanagan for two thirds of the PPN's value ($150,000) plus annual interest of 8.75% payable since the case was first filed in November 2008. UBS must also pay $35,000 legal costs to Flanagan. However, no damages were awarded for the Return Optimisation note, most likely because the panel believed she was willing to accept market risk on it, says Jake Zamansky, principal of Zamansky and Associates in New York, who fought the case on her behalf.

"We showed through emails that the broker was aware how risky Lehman paper was, certainly after Bear Stearns collapsed in March," says Zamansky. "The customer was worried and wanted to sell the notes in June when there was front page news about Lehman and their credit default swaps were widening exponentially... but the broker said there was no problem - that was the core of this case."

The case, which has lasted a year, has given hope to investors with upcoming arbitration cases against UBS, despite the fact that Finra arbitrations do not constitute a legal precedent. However, UBS is likely to fight each case "tooth and nail, one at a time," says Zamansky.

"UBS is disappointed that the arbitration panel in this case awarded the claimant any damages, even if it was the only half the compensatory losses she was seeking. UBS maintains that any client losses were the direct result of the unexpected and unprecedented failure of Lehman Brothers, which affected all Lehman bondholders," said UBS in a statement after the result was announced.

Zamansky has a further two dozen Lehman Brothers cases against UBS on its books, representing both US and international cases, and is confident that it will get similar results in future arbitrations.
Other law firms have been buoyed by the result, including one Florida outfit with an upcoming case that says it is "good news for investors."