March 28, 2024

DealBook: UBS Expected to Pay At Least $1 Billion to Settle Libor Case

Axel Weber, the chairman of UBS, which is in final negotiations with American, British and Swiss authorities.Michael Buholzer/ReutersAxel Weber, the chairman of UBS, which is in final negotiations with American, British and Swiss authorities.

10:00 p.m. | Updated

Federal prosecutors are close to securing a guilty plea from a UBS subsidiary at the center of a global investigation into interest rate manipulation, the first big bank to agree to criminal charges in more than a decade.

UBS is in final negotiations with American, British and Swiss authorities to settle accusations that its employees reported false rates, a deal in which the bank’s Japanese unit is expected to plead guilty to a criminal charge, according to people briefed on the matter who spoke of private discussions on the condition of anonymity. Along with the rare admission of criminal wrongdoing at the subsidiary, UBS could face about $1 billion in fines and regulatory sanctions, the people said.

The steep penalty, a surprise given the bank’s cooperation in the case, would represent the largest fine to date in the rate-rigging investigation. In June, the British bank Barclays agreed to pay $450 million to settle accusations that it influenced crucial benchmarks.

The settlement with UBS, which is based in Switzerland, could come as soon as Monday, the people briefed on the matter said. These people cautioned that the bank’s board had not yet approved the deal and it could still fall apart.

By pushing for a guilty plea, the Justice Department may be signaling a new aggressive stance.

Authorities have been reluctant to indict big banks, fearful of the potential for job losses and the ripple effect through the broader economy. If a bank pleads guilty to a crime, the case can be tantamount to a death sentence because the institution may lose its charter to operate.

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With UBS, federal prosecutors are trying to strike a balance. By levying a charge against the subsidiary, authorities send a powerful message, but stop far short of putting the company out of business.

Prosecutors decided against indicting HSBC over money laundering, concerned over the repercussions to the financial system. Instead, HSBC, the British bank, agreed on Monday to pay a record $1.9 billion in penalties.

On Thursday, Senator Charles E. Grassley of Iowa, the top Republican on the Senate Judiciary Committee, sent a letter to Eric H. Holder Jr., the attorney general, criticizing the Justice Department for an “inexplicable unwillingness to prosecute and convict those responsible for aiding and abetting drug lords and terrorists,” referring in part to the HSBC case. Mr. Grassley called the fine “hardly even a slap on the wrist,” given HSBC’s profit.

But the UBS case offers authorities a long-awaited moment to criminally punish a big bank. While the public is still simmering over the lack of prosecutions stemming from the financial crisis, the actions against UBS could help damp concerns that the world’s largest and most interconnected banks are too big to indict.

The Justice Department’s criminal division, which arranged the guilty plea with the Japanese subsidiary, could also strike a nonprosecution agreement with the parent company, the people briefed on the matter said. The deal will force UBS to continue cooperating with the wider rate manipulation case.

In a statement, a UBS spokeswoman said the bank continued “to work closely with various regulatory authorities to resolve issues relating to the setting of certain global benchmark interest rates. As we are in active discussions with these authorities, we cannot comment further.” The authorities leading the case — the Justice Department, the Commodity Futures Trading Commission, the Financial Services Authority of Britain and the Swiss Financial Market Supervisory Authority — declined to comment.

As the UBS investigation comes to a close, global authorities are fast-tracking several civil and criminal cases in connection to the manipulation of important benchmarks, including the London interbank offered rate, or Libor. Regulators and prosecutors have uncovered evidence that points to a systemic problem with the rate-setting process, which underpins trillions of dollars of financial products like mortgages, student loans and credit cards.

Authorities contend that some bank employees reported false rates to squeeze out extra trading profits and deflect concerns about their health during the financial crisis.

The fallout from the Libor case could be significant. The Royal Bank of Scotland has indicated that it could announce penalties before its next earnings release in a couple of months. Deutsche Bank also has set aside money to cover potential fines. In all, the investigation has ensnared more than a dozen big banks.

The push for criminal charges at UBS caught the bank off guard.

After settling a tax evasion case in 2009, the bank was eager to cooperate with authorities and gain leniency in the Libor case. UBS, for example, reached a conditional immunity deal with the antitrust arm of the Justice Department, which was supposed to protect the bank from criminal prosecution under certain conditions. But the deal did not extend to the Justice Department’s criminal division, giving authorities some leeway to take action.

With its reputation and profits on the line, the bank moved to dissuade the criminal division from pursuing charges. Bank officials have been meeting with authorities in Washington in a last-ditch effort to influence the outcome, according to the people briefed on the matter.

Eventually, the bank agreed to the broad contours of a settlement that included a guilty plea by the Japanese subsidiary. The bank is still negotiating the final elements of the deal.

Prosecutors are also expected to charge a former UBS trader who featured prominently in the investigation. On Tuesday, Britain’s Serious Fraud Office arrested three men in connection with the Libor case, including Thomas Hayes, a 33-year-old former trader at UBS and Citigroup, according to people with knowledge of the matter. The three men, which also included two people who worked at the British brokerage firm R P Martin, were released on bail the same day.

A lawyer for Mr. Hayes could not be located.

Mr. Hayes is expected to be a central figure in the case against UBS. The UBS settlement is likely to include accusations that Mr. Hayes and other employees colluded with traders at other banks to influence the direction of interest rates, as part of a broader scheme to increase their profits. Some UBS traders have been suspended or fired over the matter.

Mr. Hayes built his reputation as an interest rates trader at UBS. He worked at the Tokyo office of UBS from about 2006 to 2009 before departing for Citigroup. Citigroup fired Mr. Hayes the next year, for approaching a trading desk about influencing the yen-denominated Libor rates, and the bank reported his actions to regulators.

The role of Japanese operations came to the forefront last December when the country’s regulator sanctioned both UBS and Citigroup. Local regulators discovered that traders at the banks had tried to manipulate the Tokyo interbank offered rate, or Tibor, a main benchmark for borrowing in Japan.

The efforts to rig the rate were “unjust and malicious, and could undermine the fairness of the markets,” the Securities and Exchange Surveillance Commission of Japan said in a statement when recommending the nonfinancial penalties against UBS.

UBS has a big presence in Japan. The bank has more than 1,100 employees in the country, spread across its major business lines.

The guilty plea could have collateral consequences for the unit. For one, the guilty plea delivers a painful blow to its reputation, securities experts say. Depending on the details of the case, the group could also be subjected to an independent monitor and face some limitations on its business.

Charlie Savage and Hiroko Tabuchi contributed reporting.

A version of this article appeared in print on 12/14/2012, on page B1 of the NewYork edition with the headline: UBS Unit Is Said to Be Close to Guilty Plea in Rate-Rigging Scandal.

Article source: http://dealbook.nytimes.com/2012/12/13/ubs-expected-to-pay-at-least-1-billion-to-settle-rate-rigging-case/?partner=rss&emc=rss

DealBook: S.E.C. Charges the Chinese Affiliates of 5 Big Accounting Firms

Robert Khuzami, the Securities and Exchange Commission's enforcement director.Louis Lanzano/Associated PressRobert Khuzami, the Securities and Exchange Commission’s enforcement director.

WASHINGTON – The Securities and Exchange Commission charged China-based affiliates of the five largest United States accounting firms on Monday with violating securities laws, saying that the firms failed to produce work papers from their audits of several China-based companies that are under S.E.C. investigation.

In an administrative proceeding, the S.E.C. said that the accounting firms refused to cooperate with the document request in part because the accountants “interpret the law of the People’s Republic of China as prohibiting” them from releasing the papers.

The nine Chinese companies under S.E.C. investigation all have shares that are traded in the United States, making them subject to American securities laws. The accounting firms under investigation by the S.E.C. are the Chinese affiliates of Deloitte, Ernst Young, KPMG, PricewaterhouseCoopers and BDO.

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“Only with access to work papers of foreign public accounting firms can the S.E.C. test the quality of the underlying audits and protect investors from the danger of accounting fraud,” Robert Khuzami, the commission’s enforcement director, said in a statement.

“Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions,” Mr. Khuzami said.

Among the possible sanctions is a sort of accounting death sentence: forbidding a firm from practicing before the S.E.C., meaning that the firm’s audits of publicly traded companies would not satisfy securities laws.

The S.E.C. did not name the publicly traded Chinese companies that are the subject of its document request. But the commission has previously said it is looking closely at Chinese companies that have taken part in reverse mergers in order to gain access to American investors.

In a reverse merger, a company that has continuing operations takes over a company that already has publicly traded shares. Often, these are shell companies with no real operations and whose shares are listed over the counter or among penny stocks.

The S.E.C. already has de-registered the securities of nearly 50 such companies and has filed fraud cases against 40 foreign companies and executives. Earlier this year, the S.E.C. announced an enforcement action against the Deloitte affiliate, Deloitte Touche Tohmatsu, over failure to produce documents related to an S.E.C. investigation of one of its China-based clients.

The issue also has been the focus of the Public Company Accounting Oversight Board, an independent agency that oversees accounting firms that audit publicly traded companies.

Article source: http://dealbook.nytimes.com/2012/12/03/s-e-c-charges-the-chinese-affiliates-of-5-big-accounting-firms/?partner=rss&emc=rss

Chrysler Pays Back Rescue Loan

The repayment of loans and interest owed to the United States Treasury and Export Development Canada is a significant milestone in Chrysler’s methodical comeback from bankruptcy in 2009.

Now the company’s revival will enter a new phase that depends heavily on its alliance with Fiat, which on Tuesday increased its stake in Chrysler to 46 percent, from 30 percent.

Fiat will most likely increase its ownership to 51 percent by the end of the year. Terms of Chrysler’s federal bailout allow the Italian company to gain an additional 5 percent interest when a prototype of a new fuel-efficient compact car is ready for production in the United States.

Sergio Marchionne, who is chief executive of both auto companies, said the new car should be completed by December and would be produced beginning next year at a Chrysler plant in Illinois.

“It’s my intention for us to have the car ready by the fourth quarter,” Mr. Marchionne said at a ceremony marking the loan repayments.

Mr. Marchionne was joined at the event by Ron A. Bloom and Brian Deese, two members of the auto task force that was assembled by President Obama to shepherd Chrysler and General Motors through bankruptcy reorganization with taxpayer aid.

Many people in the auto industry were skeptical that Chrysler could survive even after its financial bailout.

But at the ceremony held at a Chrysler plant outside Detroit, Mr. Marchionne said the company had defied the odds by turning out new, improved products that are being sold at a profit.

“We have collectively found the strength to fight against this death sentence placed on our company from the very beginning,” Mr. Marchionne said to the cheers of hundreds of workers at the plant in Sterling Heights, Mich.

Mr. Marchionne made his remarks in front of a red, white and blue sign that said “PAID” in huge letters. Retiring its government loans will not only save Chrysler an estimated $350 million a year in interest payments, but it should also bolster its image in the eyes of American consumers.

“The loans are no longer a negative in the marketplace,” said Rebecca Lindland, an analyst with the research firm IHS Automotive. “It also frees up more cash for them to build a better product.”

Chrysler was able to repay the loans because it had negotiated new financing with a consortium of investment banks that includes a term loan of $3 billion, debt securities totaling $3.2 billion and a revolving credit facility of $1.3 billion.

The loan repayment was also helped by funds from Fiat, which paid Chrysler $1.3 billion to increase its stake to 46 percent.

Chrysler was not obligated to pay back its United States loans until 2017. In a statement, President Obama said that the early repayment was further proof that government intervention in Detroit’s troubles was a prudent decision.

“While there is more work to be done, we are starting to see stronger sales, additional shifts at plants and signs of strength in the auto industry and our economy,” the president said.

Mr. Bloom, who is now the president’s special assistant on manufacturing policy, said Chrysler’s comeback had happened “more quickly than we had hoped.”

The Treasury Department still holds a 6.6 percent stake in Chrysler, which it could begin selling when Chrysler holds a public stock offering.

Mr. Marchionne said he was committed to the stock offering, but had not yet set a timetable.

Mr. Bloom said the government would be “opportunistic” in divesting itself of its shares but declined to predict a time frame.

With the loan repayments behind it, Chrysler can now concentrate on maintaining its slow but steady resurgence in the marketplace.

Sales at Chrysler rose 22.5 percent through the first four months of this year, compared with a 19.6 percent increase for the overall American market. Much of the gains have resulted from new models like revamped versions of the Jeep Grand Cherokee sport utility vehicle and Chrysler 300 sedan.

But for the longer term, Chrysler needs more competitive small and midsize cars based on Fiat technology to broaden its product mix.

“Chrysler’s alliance with Fiat is crucial to its survival,” said Bruce Clark, a senior vice president at Moody’s Investors Service. “The union is vital to rebuilding Chrysler’s product portfolio and sustaining its business model.”

One worker at Tuesday’s ceremony said Chrysler’s Italian partner was so far doing a much better job integrating with the company than one of its previous owners, the German carmaker Daimler.

“There’s just a whole different feeling to it,” said Russell Bell, an electrician who has worked for Chrysler since 1973. “Fiat coming in was probably the lifeline that we needed.”

Article source: http://feeds.nytimes.com/click.phdo?i=5583e9824c86b9791d4f0bddc2c977d2