UBS Pleads Guilty, Fined $1.5 BILLION

When does this end? Another major fine - in fact, a historic fine - against UBS as it pleads guilty to allegations that it engaged in a multiyear scheme to manipulate interest rates.
According to the New York Times, the cash penalties represented the largest fines to date related to the rate-rigging inquiry. The fine is also one of the biggest sanctions that American and British authorities have ever levied against a financial institution, falling just short of the $1.9 billion payout that HSBC made last week over money laundering accusations.
The UBS case reflects a pattern of abuse that authorities have uncovered as part of a multi-year investigation into rate-rigging. The inquiry, which has ensnared more than a dozen big banks, is focused on key benchmarks like the London interbank offered rate or Libor. Such rates are used to help determine the borrowing rates for trillions of dollars of financial products like corporate loans, mortgages and credit cards.
According to the NYT story, the wrongdoing occurred largely within the Japanese unit, where traders colluded with other banks and brokerage firms to tinker with Yen denominated Libor and bolster their returns. During the 2008 financial crisis, UBS managers also “inappropriately gave guidance to those employees charged with submitting interest rates, the purpose being to positively influence the perception of +UBS’s creditworthiness,” according to authorities.
UBS Pleads Guilty, UBS Pays $1.5 Billion Over Rate Rigging - NYTimes.com.

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• UBS Bankers Face Criminal Charges Over LIBOR

UBS' Track Record of Averting Prosecution Coming to an End?

In recent years UBS has increasingly gained a reputation for being an bad firm.  The latest Libor rate scandal, which affected an untold number of customers, and their brokers, is just the most recent example.

The New York Times has picked up the story, and urges the Justice Department to consider the record of the Swiss banking giant. UBS is one of more than a dozen banks being investigated for manipulating interest rates for their own benefit. As the NYT correctly points out, at UBS, a series of immunity, nonprosecution and deferred prosecution agreements in recent years seems to have had scant, if any, deterrent effect.

As the article points out, UBS is not alone in its seemly never ending string of violations and charges, but in many ways, UBS is in a league of its own given its track record for scandals. UBS was deemed "too big to fail" in the financial crisis and had to be bailed out after a $50 BILLION write-down on mortgage backed securities.

The NYT has summarized its ability to escape criminal prosecution, presumably because of its status. However, the continued impact of its conduct on the investing public, its own brokers and employees, and the markets in general, cannot, and should not be ignored.

•  UBS obtained a deferred prosecution agreement in 2009 for conspiring to defraud the United States of tax revenue by creating more than 17,000 secret Swiss accounts for United States taxpayers who failed to declare income and committed tax fraud. UBS bankers trolled for wealthy clients susceptible to tax evasion schemes at professional tennis matches, polo tournaments and celebrity events. One UBS banker smuggled diamonds in a toothpaste tube to accommodate a client. In return for the deferred prosecution agreement, UBS agreed to pay $780 million in fines and penalties and disclose the identities of many of its United States clients. At the same time it settled Securities and Exchange Commission charges that it acted as an unregistered broker-dealer and investment adviser to American clients and paid a $200 million fine. In October 2010 the government dropped the charges, saying UBS had fully complied with its obligations under the agreement. 

• In May 2011, UBS admitted that its employees had repeatedly conspired to rig bids in the municipal bond derivatives market over a five-year period, defrauding more than 100 municipalities and nonprofit organizations, and agreed to pay $160 million in fines and restitution. An S.E.C. official called UBS’s conduct “a ‘how to’ primer for bid-rigging and securities fraud.” UBS landed a nonprosecution agreement for that behavior, and the Justice Department lauded the bank’s “remedial efforts” to curb anticompetitive practices.

• In what the S.E.C. called at the time the largest settlement in its history, in 2008 UBS agreed to reimburse clients $22.7 billion to resolve charges that it defrauded customers who purchased auction-rate securities, which were sold by UBS as ultrasafe cash equivalents even though top UBS executives knew the market for the securities was collapsing. Seven of UBS’s top executives were said to have dumped their own holdings, totaling $21 million, even as they told the bank’s brokers to “mobilize the troops” and unload the securities on unsuspecting clients. As Andrew M. Cuomo, who was New York’s attorney general then, put it: “While thousands of UBS customers received no warning about the auction-rate securities market’s serious distress, David Shulman — one of the company’s top executives — used insider information to take the money and run.” Besides reimbursing clients and settling with the S.E.C., UBS paid a $150 million fine to settle consumer and securities fraud charges filed by New York and other states. It again escaped prosecution. 

There is more at the New York Times, read the entire article.
UBS’s Track Record of Averting Prosecution

FINRA Fines Citi, Morgan, UBS and Wells $9.1 Million for ETFs

FINRA announced that it has fined Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

We have represented investors who lost significant sums of money in leveraged ETFs, which are securities which seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms' registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

 More...

SEC charges UBS With Overstating Prices

Yet another problem at UBS. What is going on over there? - SEC Charges UBS with Overstating Prices of Securities - some by 100%!

SEC charges UBS advisory arm with overstating prices of securities in three mutual funds - Securities Technology Monitor. - Financial Planning

UBS Trader Loses 2 BILLION Dollars

I really thought it was going to be Merrill Lynch that would be the next firm to have problems, given the disaster known as Bank of America, but I might have been wrong.
Then again, no one could really expect me to know, or even guess, that UBS would allow a trader to lose 2 BILLION dollars. Now, it is UBS that is in the news, and the target of rumors and speculation regarding how long it can hold on.
In just the last few days:
Trader scandal may hamstring UBS' recruiting  - apparently the wealth management business is getting hurt by the losses. Quite frankly, there is a serious disconnect here, if wealthy individuals are staying away from UBS because a trader in Europe lost 2 BILLION dollars, but apparently that is happening.

UBS 'business model is gone' — and rich clients could follow - according to this analysis, Ermotti will have" to rebuild investor confidence shaken by the failure of the bank's risk controls. He will have to shrink an investment bank to conserve capital as well as bolster the bank's wealth management operations, which generate about 41 percent of the bank's revenue. There, he will have to prevent wealthy clients from pulling funds from the country's largest wealth manager."

New UBS boss: U.S. brokerage not for sale -not an unexpected rumor, but interesting that there was a denial.

UBS Chief Resigns Over Rogue Trader Affair - this might have been overkill, but bravo! for taking responsibility for mistakes made during your watch.

Court Confirms Scope FINRA Arbitration Jurisdiction

The federal appellate court in New York has rules that an issuer who used UBS' auction rate securities services can force UBS to arbitrate a dispute over those services under the mandatory arbitration provisions under FINRA's rules.

The securities industry is the only industry in the United States where its firms and employees are forced to arbitrate disputes with their customers, and between themselves, by government regulation. This decision clarifies the scope of that requirement, which only requires a firm to arbitrate disputes with "a customer."

Some commentators, including my friends at the ADRProfBlog, are calling the decision an expansion of FINRA arbitration jurisdiction. I don't agree, and do not believe there was ever a serious dispute over the definition of "customer" in the FINRA rules. As the Court pointed out, every definition of "customer" is basically one who purchases goods or services. The Isssuer in the case was clearly purchasing UBS' services in connection with the maintenance and operation of its auction rate securities auctions, and as an underwriter, was a customer.

There is a more interesting aspect to this decision however. The Issuer filed a FINRA arbitration against UBS alleging fraud in connection with the auction rate securities program organized and operated by UBS. UBS is losing arbitration claims left and right, over auction rate securities and Lehman Principal Protection Notes. UBS did not want to go to a FINRA arbitration, and filed in Court to stop the arbitration. The Federal District Court denied the request, ruling that the Issuer is a customer. UBS appealed again, to the Second Circuit, which again ruled that the Issuer was a customer. Which, as noted above, was the only answer that the Court could reach under these circumstances.

Is this a case of UBS attempting to run up its adversary's legal costs in order to achieve a result to which it would not obtain from a court? Perhaps, and in this case the adversary had the funds to fight. What happens when they engage in such conduct with an employee, or a customer? 

 

 

 

Second Circuit expands FINRA’s arbitration jurisdiction

Faith in UBS Goes Rogue

Can someone explain how a major international bank can be the victim of fraudulent trades by an employee that cause losses of 2 BILLION dollars? How does that happen? Where are the internal controls that would prevent a trader from placing trades of the size or frequency that could result in losses of that magnitude?

You would think we were talking about Bank of America, but no, this time it is UBS, another bank that cannot run a brokerage firm or investment bank.

UBS has proven itself to be a disaster, and it is amazing that more individual at UBS have not gone to jail, or at least been banned from the securities industry. From Auction rate securities, Lehman Principal Protection Notes, Tax Evasion, rigging municipal bond transactions in 36 states, UBS has been accused of all sorts of fraud in the past few years, and the fines alone have totaled millions of dollars. One can only imagine the losses that some of this activity caused to its clients.

Now its own employee has caused losses of 2 BILLION dollars.

 

 

 

HEARD ON THE STREET: Faith in UBS Goes Rogue - WSJ.com

Faith in UBS Goes Rogue

More Fraud Charges Against UBS

The hits just keep on coming.  UBS has paid huge fines for Auction Rate Securities fraud, Principal Protection Note fraud, and tax fraud, as well as losing case after case to its own investors who purchased Lehman Principal Protection Notes. Now it has settled fraud charges with the SEC which accused the firm of fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.

UBS has agreed to pay $47.2 million that will be returned to the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.

SEC Charges UBS with Fraudulent Bidding Practices Involving Investment of Municipal Bond Proceeds; 2011-105; May 4, 2011

UBS To Reward Reps for Loyalty and Growth

Competition for brokers - or rather their assets - has intensified over the past two years as firms consolidate. My firm has seen a significant increase in the number of broker transition cases we are handling, both in brokers who are being forced out of their positions, and in those who are voluntarily changing firms.

UBS was one of the firms that was aggressively luring brokers from the competition, at one point in time offering over two times their trailing 12 months gross commissions to join UBS. Of course, those checks came with significant handcuffs - promissory notes with up to 9 years of forgiveness.

UBS is apparently trying to insure that they don't lose those reps. Registered Representative is reporting that the firm has unveiled a new compensation program that will reward the firm's biggest financial advisors for loyalty and growth.

The program applies to advisors who have at least $500,000 in revenue in 2010, which apparently applies to approximately 3,000 of UBS’s network of 7,000 advisors. Those brokers would receive 65% of their gross production for 2010, structured as a seven-year forgivable loan.

More>>>

Lehman Note Investor Obtains 1/2 an Award

A FINRA arbitration panel has awarded damages against UBS in favor of an investor who purchased Lehman principal protected notes.

While the WSJ is presenting the award as a significant win for the investor, and an indicator of the outcome of other cases relating to the Lehman notes, I am not so sure this is that big a win. According to the details contained in the article, the investor obtained 1/2 of the claimed damages, plus interest, costs and an undetermined amount for attorneys fees.

Some would say that any recovery is a good recovery, but is this really a win for the investor? The Lehman notes are worthless.

As in most arbitration awards, the three-person arbitration panel didn't give reasons for its findings. According to the WSJ, the investor argued  that the notes were "speculative derivative securities" and were "unsuitable" for unsophisticated investors. Investors, and brokers, need to be careful in these cases.

I addressed these issues in my column, Lehman Principal Protected Note Arbitrations. While 1/2 the loss is better than a total loss for the customer, it is not necessarily a win for the customer, nor should it be the standard for the other Lehman Note cases that have been filed.

I do not know the details of the case, but if the investment was unsuitable, then it was unsuitable, and the investor should receive compensation for the loss. In addition, suitability cases are fact specific and investor specific. You simply can't attribute the parameters of an award in one case to other cases.

I will continue to update the blog as new awards become available.

More>>>

[Edited and updated 12/8/09]

Merrill Exec to Head UBS Wealth Management

After months of speculation, UBS today named Robert McCann as its new head of wealth management in the Americas.

Mr. McCann, the former head of the brokerage business at Merrill Lynch & Co., left Merrill in January after the acquisition by Bank of America. More>>>

Lehman Principal Protected Note Arbitrations

Spurred by an enforcement proceeding by the State of New Hampshire and a class action complaint filed against Lehman Brothers executives, retail investors are retaining attorneys to attempt to recover their investment losses in Lehman Brothers. This article from SECLaw.com examines the potential for these cases, and the defense of same.  More>>>

Citi's Krawcheck to Head BofA's Wealth Management Group.

Former top Citigroup executive Sallie Krawcheck is joining Bank of America Corp. as head of its global wealth and investment management group, according to a statement from the Charlotte, N.C.-based company. She replaces Brian Moynihan, who was named to a new position as the head of consumer banking.

Ms. Krawcheck — who was reportedly being considered to take over the top spot at UBS AG's U.S.-based wealth management business — was most recently in charge of the wealth management business at Citigroup Inc. of New York.

UBS Retail Product's Executive Takes Leave

Michael Weisberg, the head of products and services for UBS AG's U.S. and Canadian wealth management businesses, has taken an indefinite leave of absence, according to an article in todays electronic version of Investment News.

According to the site, Weisberg's departure was announced internally this week, as rumors swirled that the firm's U.S. brokerage business was likely to be reorganized. More>>>

Accountant Pleads Guilty in UBS Tax Fraud Case

The UBS tax fraud case is expanding. An accountant who hid money with UBS pleaded guilty to filing a false tax return. According to press reports, prosecutors based their charges on UBS records that they obtained as part of a defferred compensation agreement.

So much for customer protection and Swiss banking secrecy.

http://www.miamiherald.com/business/story/1114689.html

Court Dismisses ARS Class Action Against UBS

Judge Lawrence M. McKenna of the SDNY dismissed the securities class action against UBS, which alleged that the bank misled investors when it sold them auction rate securities.  The court ruled that the case could not continue because UBS had already reached a $19.4 billion settlement in the matter in August with the SEC and several state regulators in which UBS agreed to buy back nearly that amount of securities and pay a fine, the NYT reports. From Securities Docket.