April 18, 2024

UBS Settles Fraud Cases Over Munis

The Justice Department, the Securities and Exchange Commission, the Internal Revenue Service and 25 state attorneys general entered into the agreement with UBS, which admitted that, from 2001 through 2006, several of its former employees repeatedly manipulated the bidding process when local governmental entities or nonprofit organizations sought to invest the proceeds of municipal bond offerings.

The conduct of UBS and its employees “corrupted the competitive process and harmed municipalities, and ultimately taxpayers, nationwide,” said Assistant Attorney General Christine A. Varney, who oversees the federal antitrust division. “Today’s agreements with UBS ensure that restitution is paid to the victims of the anticompetitive conduct, that UBS pays penalties and disgorges its ill-gotten gains.”

UBS said in a statement that it was pleased to have resolved the matter. “The underlying transactions were entered into in a business that no longer exists at UBS, and involved employees who are not longer with the firm,” the statement said. The company also said that it had made provisions for the settlement in prior quarters and it therefore “will have no effect on the firm’s future financial results or on any current business of UBS.”

UBS is the second big banking institution to settle accusations of bid-rigging in the municipal bond derivatives market. In December, Bank of America agreed to pay $137 million in restitution after voluntarily disclosing its anticompetitive conduct and agreeing to cooperate with authorities in further investigations.

As part of the broader investigation of bid-rigging in the municipal securities market, the Justice Department has brought criminal charges against 18 former executives of various financial services companies. Nine of the 18 have pleaded guilty, including one former UBS employee. Three other UBS employees also have been charged with criminal activities related to the municipal market.

Most of the $160 million to be paid by UBS will go to municipalities that were affected by the conduct, officials said, which involved more than 100 transactions. According to an outline of the charges by the S.E.C., the company played various roles in the illegal bidding scheme, sometimes obtaining advance information about competing bids for financial products, and in other cases facilitating illegal activity by submitting sham bids for services.

Our complaint against UBS reads like a ‘how to’ primer for bid-rigging and securities fraud,” Elaine C. Greenberg, chief of the S.E.C.’s municipal securities and public pensions unit, said at a press conference announcing the settlement.

UBS, which acquired the American investment bank
PaineWebber in 2000, was at the time of its conduct one of the largest underwriters of municipal securities in the nation. UBS closed its municipal reinvestment and derivatives desk in 2008.

State and local governments often sell bonds to raise money to pay for projects like roads, schools and hospitals. Until they are ready to spend the money, the entities invest the proceeds in contracts that are often tailored to meet specific needs in terms of the timing of spending and required collateral to insure their debts.

Investment firms offer to sell those contracts at given prices, and bidding for the right to provide the service is supposed to be conducted at arm’s length. But UBS often conspired with the party overseeing the bidding to guarantee that it bid just enough to win the contract, thereby maximizing its own profit.

Of the $160 million to be paid by UBS, $91 million will be routed through the Justice Department and the states to the municipalities and other customers affected. UBS will also pay $47 million through the S.E.C. to the customers affected, and $22 million through the I.R.S.

Under I.R.S. regulations, the proceeds of tax-exempt municipal securities offerings must be invested at fair market value. Because of the fraudulent conduct by UBS, the tax-exempt status of billions of dollars of securities was jeopardized, officials said. That status was reaffirmed by the I.R.S. as part of its settlement with the company.

Article source: http://www.nytimes.com/2011/05/05/business/05muni.html?partner=rss&emc=rss

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