UBS and one of its brokers were slammed with a more-than-$95 million arbitration award last week over allegations that they inappropriately recommended clients short Tesla stock.
UBS vowed to appeal the $95.3 million decision, which a securities expert called easily one of the biggest he's seen in his 40 years in the industry. The award arose from allegations that UBS and its broker Andrew Burish, the managing director of the Burish Group in Madison, Wisconsin, had violated various industry rules and state laws by recommending nine clients short shares of the electric vehicle company Tesla. The clients were members of an extended family that included the prominent Iowa business couple Dennis and Lesilie Hansen, the owners of the auto parts maker Precision of New Hampton.
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The disclosure on Burish's BrokerCheck page says Burish was accused of fraud after he acknowledged he had ceased shorting Tesla in his own accounts between July 2019 and June 2020. Burish wrote on BrokerCheck that he "adamantly denies the allegations."
"Claimants were wealthy and experienced short traders who were well advised of the substantial risks of short selling and chose to initiate and hold their short positions in the face of losses and volatility," he wrote. "Claimants made these well informed decisions independent of any alleged reliance on the [financial advisor's] personal trading activities."
In their complaint filed with a Financial Industry Regulatory Authority panel, the claimants had asked for just over $36 million. The arbitrators went well beyond that, in part by citing Iowa state law.
As is often the case in such disputes, the arbitrators did not go into the reasons for their decision. The bulk of the award — $92.2 million in punitive and compensatory damages — was levied on UBS. Burish, whose large practice boasts of $6.2 billion under management and 50 employees, was separately hit with just over $3 million in damages.
A spokesperson for UBS said the firm disagrees with the decision.
"These experienced investors had been pursuing an aggressive shorting strategy profitably for years and complained only after they took losses," the spokesperson said. "We intend to seek judicial review of the award on the basis, among other grounds, that the punitive damages were inconsistent with the facts and the law."
A representative of Burish's office declined to comment.
The punitive damage portion cites a part of
Douglas Schulz, a securities expert and the president of Invest Securities Consulting, said it's always difficult to have an arbitration decision overturned on appeal. Defendants generally have to show that the arbitrators were somehow biased or corrupt, that they disregarded the law or that their award wasn't reasonable.
Schulz said he thinks UBS will argue the punitive part of the damages against it and Burish were excessive. The firm may even approach the claimants to see if they'd be willing to settle for a lesser amount, he said.
Schulz said the $95.2 million award is easily one of the largest he's seen in his nearly 40 years in the industry.
"They'll come back with something in the law that says punitive damages can't be unreasonable," Schulze said. "And this is off the charts with the punitive. Every claimant's lawyer will now be holding this up and saying, 'Quit telling me FINRA arbitrators are stingy. Look at this.'"
A FINRA spokesperson confirmed the award against UBS is the second-largest according to the agency's records. The largest, for $400 million, was handed down
Of the claimants, Dennis and Leslie Hansen are receiving by far the largest amounts. Their award consists of $17 million in compensatory damages and $51.1 million in punitive damages from UBS, as well as nearly $2 million in compensatory and punitive damages from Burish.
Their son, Tyler Hansen, and his wife, Noelle, are getting nearly $1.6 million in compensatory and punitive damages from UBS and nearly $190,000 from Burish. Bradley and Jordan Nelson are getting just over $1 million from UBS and nearly $130,000 from Burish.
Lindsey and Nicholas Valentini are getting roughly $3.2 million from UBS and $190,000 from Burish. And Mark Kramer is receiving roughly $16.5 million from UBS and just over $560,000 from Burish.
Burish's request to have the clients' complaints expunged from his record was denied. The arbitration panel ordered the $90,000 in session costs generated by its hearings to be divided evenly between the claimants, and UBS and Burish.
The complaint against UBS and Burish contends the clients were given "boilerplate paperwork" and encouraged to enter into an "aggressive, high-risk trading strategy designed to produce speculative, short-term profits" even though they weren't "professional investors." It says they were urged to hold their short positions in Tesla "in the face of mounting losses."
Schulz said shorting stock is risky in part because, if the shares start gaining value, investors can be required to put up more money into a so-called margin account — which helps ensure their ability to pay should they lose the bet. Schulz said he doesn't buy the often-floated argument that rich clients are, by their mere possession of wealth, necessarily sophisticated investors.
"Rich is irrelevant," Schulz said. "The securities regulations are not socialistic. Rich people have the same rights as poor people."
