(Corrects 2nd paragraph to specify that debt sold by UBS was
issued by Lehman, which went bankrupt in 2008)

By Joseph A. Giannone

NEW YORK (Reuters) - Even as UBS launches a global
campaign to revive its banged-up brand, the Swiss bank's U.S.
brokerage faces another costly and embarrassing wave of
regulatory actions.

Investor lawyers for the past year have been taking UBS to
task for selling Lehman Brothers debt with such reassuring
names as "100 percent principal-protected notes" that promised
robust returns with no risk of loss. These Lehman-issued notes
were largely wiped out when the U.S. investment bank went
bankrupt in September 2008.

A string of arbitration losses over the past year may soon
be followed by a round of state lawsuits, class actions and
possibly intervention by the Securities and Exchange Commission
and the Financial Industry Regulatory Authority.

"UBS is something of a house on fire right now," said Jacob
Zamansky, a New York lawyer who helped a South Carolina woman
win the first Lehman note arbitration case last year. "They're
doing poorly in arbitration. What happens when FINRA and the
SEC get involved?"

After Lehman, UBS was the largest seller of Lehman
protected notes -- zero-coupon Lehman debt linked to an index
or a basket of other securities. These so-called structured
products offer limited gains with the assurance that investors
would get their money back if the linked securities fell.

UBS sold more than $1 billion of these structured notes.

Unfortunately for investors, these notes were ultimately
just unsecured Lehman debt. UBS brokers continued to sell these
notes to retail investors through 2008 even as Wall Street grew
worried about Lehman's financial strength.

"What we've learned is there were serious concerns inside
UBS about these things, certainly during the spring of 2008,"
said Phil Aidikoff, whose law firm Aidikoff, Uhl & Bakhtiari
has represented investors.

FOLLOWED THE RULES

Lawyers representing dozens of cases and a few state
officials contend the notes were unsuitable for small
investors, who were lulled by the "principal protected" name.

UBS said it was "following all regulatory requirements,
well-established sales practices and client disclosure
guidelines" when it sold these notes. "Any client losses were
the direct result of the unexpected and unprecedented failure
of Lehman Brothers."

So far, it appears arbitrators are siding with investors,
who have prevailed in five of six rulings, according to FINRA
arbitration documents.

In some cases investors are receiving full restitution -- a
rarity -- and even legal and expert fees. Lawyers said UBS is
now settling more of these cases outside of arbitration.

Soon, state and federal groups will join the fray.

The Swiss bank in its latest quarterly financial report
warned it is named in class-action suits and "numerous"
investor arbitrations, while also receiving inquiries from
"state regulators and FINRA."

New Hampshire led the charge in June 2009 when it became
the first state to allege "unfair sales practices" and
"recommending unsuitable investments" to more than 40 state
residents.

"We believe 'principal protection' meant one thing to
investors, but something entirely different to UBS," Kevin
Moquin, a New Hampshire attorney, said at the time.

Missouri, which took a lead role pursuing auction rate
securities complaints, is one of several states that are also
probing UBS and its Lehman note sales, Missouri Securities
Commissioner Matt Kitzi said.

"These are complex products that investors are expressing
some concern and confusion over," said Kitzi.

Industry watchdogs have been slower to respond. FINRA in
December advised brokers that promotional materials must not
overstate the level of protection, though it stopped short of
banning use of the term "principal protected."

SEC staffers last month began examining how banks described
risks of structured note offerings and whether "principal
protection" was deceptive.

IMPACT

The potential damage to UBS could be significant in terms
of both financial burden and reputation.

UBS recorded $900 million in charges related to auction
rate securities, long touted as a high-yielding cash
equivalent. These securities, of which UBS sold $22 billion,
became impossible to sell when markets seized up in 2007.

State regulators two years ago said UBS continued selling
these securities even as the bank's executives privately
worried markets were crumbling. UBS, like other banks, was
forced to repurchase these securities from investors.

So far arbitrators seem to be taking a stern view of UBS.
Notably, one investor received full restitution of $432,000
plus $53,000 in attorney fees.

"This was the panel's way of telling UBS this was an
egregious situation," said Seth Lipner of Deutsch & Lipner,
whose Garden City, New York, firm represented that investor and
has filed more than a dozen cases.

Beyond the financial burden, the Lehman notes may put
further strain on a brokerage hard hit by a series of market
missteps and regulatory run-ins.

UBS suffered $52 billion of losses on ill-timed U.S.
subprime markets, the biggest losses by a European bank during
the credit crisis. UBS had to be bailed out by Switzerland.

Then there was news that U.S. authorities accused UBS of
helping Americans hide assets overseas and avoid taxes, and
clients left in droves.

The question is whether the Lehman cases will further
strain a brokerage force that lost more than a thousand
advisers over the course of a year, driven away by round after
round of bad news.

"With UBS, it's just one thing after another," said
Zamansky. "They're like the BP of Wall street."
(Reporting by Joseph A. Giannone, editing by Matthew Lewis)