UBS is making a longshot attempt at overturning a recent windfall award against it and one of its brokers, arguing a FINRA arbitration panel ignored federal and state laws when imposing nearly $70 million in punitive damages.
UBS filed suit on Monday in federal court in Iowa seeking to overturn or reduce a $95.3 million arbitration award in a case over a broker recommending shorts in Tesla stock. That amount included roughly $69.7 million in punitive damages against UBS and Andrew Burish, a broker in Madison, Wisconsin. Punitive damages are generally meant to punish egregious misconduct and deter future violations of the same sort.
Burish was accused in 2021 by a wealthy extended family in Iowa of costing them millions of dollars through his advice related to the short trades, essentially bets that the Tesla’s share price would fall. A three-member Financial Industry Regulatory Authority arbitration panel agreed with them last month, walloping UBS with $69.2 million in punitive damages and Burrish with $500,000 in “punies.”
UBS immediately vowed to seek judicial review of the decision, in part on the grounds “that the punitive damages were inconsistent with the facts and the law.” In its challenge on Monday, it argued that case law suggests punitive damages should not be allowed to exceed compensatory damages. In this case, they would be set at $23 million at most.
But UBS went on to question if the claimants have a right to punitive damages in the first place.
“Even assuming everything Claimants alleged during the arbitration is true, this case involved purely economic harm suffered by a group of wealthy businesspeople,” according to the filing. “At worst, UBS failed to supervise a single financial advisor’s investment advice.”
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A UBS spokesperson declined to comment further. Burish, who could not be reached for this article, wrote on BrokerCheck that the claimants “were wealthy and experienced investors who were well advised by both me and my supervisors of the substantial risks of short selling Tesla, and chose to initiate and hold their positions in the face of high volatility and eventual losses.”
UBS acknowledges in its filing that the law sets a “high bar” for attempts to have arbitration awards overturned or modified. But UBS argues this particular award was exceptional, especially the “grossly excessive” punitive damages.
As is often the case in arbitration decisions, the panel in this case did not furnish its reasons for granting a particular award. UBS argues in its filing, though, that FINRA makes an exception for punitive damages, meant to punish egregious misconduct and deter future violations.
Those, according to UBS, have to be justified in writing. The panel in this case, though, “failed to provide any explanation of the basis for the punitive award or its total size,” the filing contends.
UBS notes that the investors in the dispute grounded their claims for punitive damages largely on text messages their broker, Burish, had allegedly sent them to discuss shorts in Tesla stock. The claimants accused Burish of deleting some of those communications and that UBS had not properly monitored his actions.
The claimants, led by the prominent business couple Dennis and Leslie Hansen — the owners of the auto parts maker Precision of New Hampton — argued they were encouraged by Burish to hold their short positions “in the face of mounting losses.” The price of Tesla stock went from $15 to $95 in the period in question, from September 2019 to July 2020.
The Hansens and their fellow claimants placed great emphasis on a $125 million settlement UBS reached with the Securities and Exchange Commission in September 2022 over alleged failures to track and record digital messages sent by brokers to clients and each other. Under the Biden administration, federal regulators slammed firms large and small with more than $3 billion in fines for allegedly not supervising “off-channel communications” sometimes sent on WhatsApp and similar encrypted messaging services. UBS admitted to failures that were “firm-wide, and involved employees at all levels of authority.”
The claimants argued in arbitration that UBS should be subject to heavy punitive awards because it had not “learned its lesson” from the SEC settlement. UBS countered in its legal challenge Monday that, even if the allegations against it were true, it shouldn’t be subject to a “punitive award on regulatory violations that a federal agency has already addressed.”
UBS expressed frustration that punitive damages in arbitration cases may be getting out of hand. Barely a week after getting hit, Stifel was slammed with a nearly $133 million arbitration award that included $79.5 million in punitive damages.
UBS contends in its filing Monday that the arbitration panel in its case erred by not meeting certain criteria set for rewarding punitive damages under Iowa state law. Iowa, for instance, requires judicial factfinders to first decide if alleged misconduct “constituted willful and wanton disregard for the rights or safety of another.”
“Because these failures undermine the validity of the panel’s entire process, the proper remedy is vacatur of the entire award,” UBS argued.
