An East Coast investment firm is attempting to overturn a portion of an arbitrator’s award of $95 million to an Iowa family that claimed it was given bad advice on short-selling Tesla stock.
UBS Financial Services and one of its managing directors, Andrew Burish, are suing a group of nine New Hampton, Iowa, residents in U.S. District Court, all of whom are former UBS customers, and most of whom are part of the same family: Dennis, Leslie, Tyler and Noelle Hansen; Bradley and Jordan Nelson; Lindsey and Nicholas Valentini; and Hansen family friend Mark Kramer.
The New Hampton residents allegedly reaped profits of nearly $1.5 million by short-selling various stocks, including Tesla, for two years beginning in 2017. In late 2019, they allegedly resumed short-selling one particularly volatile stock, Tesla.
Typically, short-selling involves borrowing shares from a broker and immediately selling them. Then, if the price falls as expected, the investor buys back the same number of shares at the lower price, realizes a profit, and returns the shares to the broker.
The strategy is risky and only works if the stock’s price falls after the initial sale, allowing the stock to be repurchased at a lower cost.
In the case of Tesla, its stock price began an unprecedented and unexpected climb in late 2019, right when the Hansens invested.
Court records indicate that throughout 2020, the Hansens’ losses mounted, but they stuck with their strategy, believing Tesla’s price would eventually fall. Eventually, their total losses exceeded $23 million.
In 2022, the family and Kramer initiated a claim against UBS and Burish, alleging fraud, breach of fiduciary duty, violations of Financial Industry Regulatory Authority rules governing investment advice, and negligent supervision of a financial advisor.
The family claimed Burish had given them unsuitable and one-sided investment advice concerning their strategy to short-sell stock in Tesla. They also claimed Burish had violated the law by sending them unsuitable investment advice via text messages that he later deleted, and that he fraudulently led them to believe he, too, was short-selling Tesla stock even after he was no longer participating in that strategy.
In late February, an arbitrator’s panel sided with the Hansens and found UBS liable for compensatory damages of $23,059,522 and Burish liable for compensatory damages of $2,562,169.
In addition, the panel awarded $69,178,566 in punitive damages from UBS and $500,000 in punitive damages from Burish.
In their newly filed lawsuit, UBS and Burish argue that “the panel’s award of nearly $70 million in punitive damages was grossly excessive, irrational, and contrary to well-defined and dominant public policy.” They allege the maximum punitive award against UBS should have been $23,059,522 — an amount equal to the compensatory damages.
In addition, UBS and Burish argue that in cases where the fact finder does not state the conduct justifying the punitive damages was directed specifically at the claimants in the case, at least 75% of any punitive damages must go to a civil reparations trust fund that is administered by the state court administrator. In the UBS case, the lawsuit claims, the panel awarded the Iowans the full $69 million in punitive damages, with nothing allocated to the civil reparations trust fund.
UBS: Hansens were savvy investors
In a brief filed in January with the arbitration panel, lawyers for the Hansens argued UBS had failed to ask Burish “fundamental investor protection questions, like why clients with no experience managing a short position or margin calls would be suitable candidates to short sell one of the most volatile stocks of all time.”
UBS’ attorney, Neal S. Robb, told the arbitration panel that Tesla was always considered a risky investment, and claimed the Hansen family was a financially savvy group of investors that “was wealthy enough to take the loss” stemming from its Tesla investments.
“The Hansens were not retirees, or socking their money away for the day that they were puttering in the garden,” Robb told the panel. “They were aggressive with their money. Putting it in ethanol plants and in jet aircraft leasing is not only sophisticated stuff, it’s relatively risky stuff.”
As for Tesla, Robb argued the company’s stock “was never relatively stable” and said it was “amazing” the company had progressed so far in recent years.
“In 2017, 2018, 2019, it was plagued with problems,” Robb told the panel. “It had continuous losses. It was running in the red. It had production problems, but at the same time it was a favorite of speculators, and the stock price zipped and zagged and went up or down. The panel may remember some of the things that happened with Tesla. At one point the CEO, Mr. Elon Musk, announced he was going to take the company private, and he had funding, which will become the subject of another big lawsuit, and the stock price went up. At another point, Mr. Musk tweeted the stock price was too high, and the stock price plummeted. So, Tesla was always a very, very volatile stock. It was never relatively stable.”
Attorneys for the Hansens argued before the panel that Burish had encouraged the family, via text messages that he later deleted, to short-sell Tesla stock, telling them, “I’m doing this with my daughter, family, friends. I’ll be doing it alongside you,” when in fact he had stopped shorting Tesla long before.
In 2022, the Securities and Exchange Commission issued a set of findings involving UBS, alleging that from at least January 2018 to September 2021, UBS employees sent and received off-channel communications with investors that it never preserved, in violation of federal regulations. That alleged failure “was firm-wide, and involved employees at all levels of authority,” the SEC found.
As a result of those findings, the SEC imposed a $125 million civil money penalty against the company.
Attorneys for the Hansen family and the other defendants in the newly filed lawsuit have yet to respond to UBS’ claims that the punitive damages are excessive.
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