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

Beware of Auction Rate Securities Settlement "Phishing" Scam

FINRA has issued an Investor Alert to warn the public about a recent auction rate securities (ARS) “phishing” scam that promises compensation from ARS settlements in exchange for personal information. Follow the link to the FINRA web site. The email looks like it originated from FINRA—although it did not. It purports to inform the recipient of regulatory actions, including fines imposed by FINRA related to ARS, and states that the recipient is due $1.5 million regardless of the amount of their ARS investment or loss. The email then “phishes” for personal information including occupation, address and phone number. More>>>

NY Sues Schwab Over ARS Sales

New York Attorney General Andrew Cuomo filed a lawsuit today against The Charles Schwab Corp., claiming the brokerage firm misled customers about the safety of auction rate securities — and the firm is digging in for a fight.

“The [attorney general’s] lawsuit casts blame for a bad situation in the wrong direction. Clients who purchased these products, and companies like Schwab that filled client orders, were misled by the major Wall Street underwriters who concealed the degree to which the auction rate securities market was so dependent on their support, Schwab spokeswoman Sarah Bulgatz wrote in an e-mail.

On its face, this appears to be over-reaching by the AG. There is a flow to these cases, and the early cases were relatively easy for the regulators. Get some customers together, tell their story, use the firm's documents, and soon enough you have a good case for misleading sales material or failing to disclose risks to investors.

Assuming that to be the case, those claims work with a firm that actually made representations or recommendations. Unless there is something odd about this case, it is difficult to see Schwab's liability here. Schwab claims that did not underwrite any of these securities, and did not market them.

So why is the NYAG going after Schwab? Well, it has a different set of allegations, and according to the press release, the AG is alleging that firm falsely represented auction rate securities as liquid, short-term investments without discussing the risks. These representations gave investors a false sense of security that their investments would always be liquid when auction rate securities, in fact, faced significant, inherent liquidity risks.

The press release also alleges that there are tape recordings of telephone calls where Schwab brokers make such statements and recommendations.

It will be an interesting battle, made more so by the fact that another discount broker, TD Waterhouse, settled similar allegations.

 More>>>

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.

More Madoff Civil and Criminal Suits to Come...

Madoff's guilty plea to 11 felony counts is just the beginning of what will be a long and complicated process to identify the full scope of the fraud, and to recover assets from Madoff, and others who profited from the fraud.

One point that may or may not be significant is that the fraud was not 50 billion dollars, but is between 10 and 17 billion, which is what we suspected when the story first broke. Either way, with only one billion having been recovered, there is much more work for the Trustee and the SEC staff to do to identify, and recover those assets.

With no plea agreement, we can expect the Trustee to attempt to attach the rest of Madoff's assets, and to go after the assets that are in his wife's name. According to press reports, Mrs. Madoff has significant assets in her name, including the $7 million penthouse on Manhattan's Upper East Side, $45 million in municipal bonds at a brokerage firm partially owned by Madoff, $17 million at Wachovia Bank, and she withdrew $15.5 million from the brokerage firm shortly before Mr. Madoff was arrested. Details are at the WSJ.

There is nothing in the press reports that indicates that Mrs. Madoff was a participant in the fraud, but she does not have to be if assets obtained by the fraud were transferred to her. That will be difficult to prove, but there is enough there to interest a prosecutor, a SIPC Trustee and a bunch of securities attorneys representing investors.

More indictments? I am sure that the prosecutors are not finished. There are the Madoff employees who allegedly helped the fraud by creating false account statements, and whatever else was done to assist the fraud. Given Madoff's plea allocution, it is clear he did not do this alone.

Some commentators are speculating that other family members will be indicted, but those claims are based on incorrect or incomplete facts. According to the information currently available, the brokerage firm employees had nothing to do with the investment advisory business. Therefore, we can expect to ultimately learn that the compliance officers at the brokerage firm had no involvement with, or knowledge of, the fraud. And no one would expect that they would - a brokerage firm compliance officer has no duty to supervise or control, the operations of the related investment advisory firm. However, prosecutors and the SEC will certainly be looking into them to determine if there is a case there.

Then there are the civil cases against those who received funds from the fraud, but those cases will undoubtedly be civil cases, not criminal.

Next up will be the feeder funds, who funnelled money to Madoff and accepted "fees" for doing so. We can expect to see indictments or at least SEC civil actions to recover those fees against them. We have been investigating claims against some of those funds, and at least on the civil side, there appear to be viable claims. Whether those rise to a criminal level remains to be seen.

Then there are the banks and financial entities in England, where Madoff was sending money to provide an appearance of activity. Those institutions may have liability for their assistance, if any, in the fraud.

After that, suits against profitable investors, for a return of those profits. We have also been reviewing those claims. Based on my prior experience in ponzi scheme cases and other fraudulent conveyance cases, there are some viable defenses for those investors. However, there have been no estimates of how much money those innocent investors received from the fraud, but their innocence may not be enough to protect them. Profitable investors have been contacting our firm and others for advice as to how to proceed going forward, and those lawsuits will be filed at some point in time.

We can be certain that the SIPC Trustee and the SEC will make every effort to locate and obtain funds obtained from the fraud. Whether those funds make it back to the investors remains to be seen. Past experience tells us that relying on the government to recover lost funds is a process that requires a great deal of patience. Investors should consider retaining their own counsel to examine their options, rather than wait for the government.

Stifel Nicolaus to Buy Back ARS from Clients

According to the St. Louis Business Journal, Stifel may buy more auction rate securities from its clients, pursuant to its voluntary repurchase plan. Earlier this month Stifel said it planned to spend between $35 million and $40 million to repurchase some of the illiquid auction rate securities held by investors

UBS Uses Google Adwords to Announce Settlement

This is a first, at least for me. I was at SECLaw.com and noticed in the Google Advertisements an ad for the UBS ARS settlement. It wasn't an ad from an attorney, it had a reference to UBS.com.

I thought someone was trying to spoof UBS' web site, or that it was someone trying to generate clicks from ARS holder by putting UBS' web site URL in the ad.

I followed the link, and lo and behold, it was a link to the real UBS site, specifically a press release about the settlement with the NY AG, the SEC and the NASAA.

An interesting concept, paying Google to advertise your multi-billion dollar settlement with regulators. I wonder if that was part of the settlement, or if UBS is really that proud of their multi-billion dollar settlement that they are paying to advertise it.

The press release provides some additional details. First, the repurchase from investors will be made over TWO YEARS, starting in January 2009. Smaller investors may be able to get out earlier, in November, but some individuals will not be liquid for quite some time - assuming of course that all of these recent scandals at UBS don't put them out of business before then.

Naturally, UBS' media folks couldn't help themselves, and attempted to spin this alleged fraud on their own customers, which resulted in $150 million in fines and billions in buy-backs as a positive:

"Today’s solution provides further relief, beginning in September, to investors who have been understandably frustrated by the industry-wide failure of the ARS market. Our leading position in supporting the market and providing liquidity is clear, and now, we are the first firm to give all clients -- private, corporate and institutional the opportunity to be made whole,” said Marten Hoekstra, Head of UBS Wealth Management Americas.

“Since the breakdown in the market, UBS clients have been offered multiple liquidity options. They have been able to borrow 100 percent against the value of their holdings. The solutions announced today provide our clients with the widest range of choices in the industry, including a two-year window during which clients can either continue to earn interest or redeem their ARS at any time,” Hoekstra added.


"Leading position" in the ARS market? They certainly were, but not in a good way.

UBS' General Counsel Aufhauser Quits

UBS In-Houser Quits Over Securities Investigation

No surprise here. As we discussed last week UBS investment banking general counsel David Aufhauser has been named in the press as one of the UBS executives who sold his personal ARS holdings in December 2007 based on information he received from other executives, while the firm was pushing the securities on its customers.

ARS Solution? - Citigroup to Buy Back ARS?

Citi talks with regulators may lead to buybacks

Here is an interesting solution to the ARS liquidity problem. Reuters and the WSJ are reporting that Citigroup is in settlement talks with regulators to resolve allegations that it engaged in wrongful conduct in selling auction rate securities to its customers. The settlement? According to the reports, Citigroup could be buying back over 5 BILLION dollars worth of the securities from its customers.

Good news for those Smith Barney investors who are holding the illiquid securities. Bad news for Citigroup shareholders........and probably for Smith Barney brokers. Someone is going to pay for a portion of that 5 billion dollars.

NY AG to Sue Citigroup over ARS?

It appears that the New York Attorney General is getting ready to go after Citigroup, not only for ARS violations, but for destruction of evidence.

We originally thought that the various headlines lines like "Citigroup subject of ARS investigations, too, filing shows - Financial Week were a bit over the top, since the substance behind the headline was that Citigroup disclosed in a 10-Q that it had received state and federal subpoenas. No big deal there, since receiving a subpoena does not mean that you are the subject of an investigation.

However, we then found the story at CNBC - Citigroup Faces Fraud Charges From New York AG which reports that "[t]he office of New York Attorney General Andrew Cuomo said Friday it plans to imminently charge Citigroup's Global Markets and Citi Smith Barney units with fraudulently marketing auction-rate securities and destroying documents that were supoenaed by the state. According to Cuomo's office, Citigroup has repeatedly and persistently committed fraud by making material misrepresentations and omissions in its underwriting and distribution of auction-rate securities by marketing them as very safe and liquid investments.

We tried to find a link to the AG's quote at his web site, but it was apparently down this morning.

Merrill Accused of Securities Fraud

How many hits can a brokerage firm take? Merrill was at the center of the research analyst scandal just a few years ago, and now it looks like they may be center stage in the ARS scandal.

According to the Wall Street Journal, Massachusetts regulators accused Merrill Lynch of co-opting "supposedly independent" research analysts to help them dump collapsing auction-rate securities on unsuspecting customers. Let's see. First they "co-opted" their own research department to get them to promote securities of issuers who they were looking to get investment banking business. Then the regulators push for independent research. Now Merrill is accused of "co-opting" the independent analysts to enable Merrill to dump its inventory of auction rate securities?

The continuing problem with Merrill did not escape the notice of investigators -

"We've seen a corruption of research," says Massachusetts Secretary of the Commonwealth William Galvin, who oversees the state securities division. "This is an issue that many of us on the enforcement side have seen years ago, and it's the same pattern."

Obviously we don't know if this is true, and on more than one occasion we have seen securities regulators misunderstand the markets, or twist a fact far enough to reverse it, but these are serious allegations, and it may not be limited to Merrill and UBS. The Journal says that this complaint, coming on the heels of the complaint against UBS, is part of a widening crackdown on "Wall Street peddlers" of the "arcane" auction products -- debt instruments that some brokers likened to stable money-market funds and other cash-like investments.

Auction rate securities are hardly an "arcane" investment, but the conduct of these firms, if true, demonstrates a dark side of big firm Wall Street that needs to be addressed. The utter contempt for the markets, for their own brokers, and most egregious, their own customers is appalling.


How did the AG's office gather enough evidence to charge Merrill? Well, you get one guess. In this day and age, what is the stupidest, dumbest, most "arcane" method of communication when you are going to do something that is illegal, immoral or unethical? Why you discuss it in email!

According to the Journal, Merrill Lynch executives, the same group of people who were severely burned when their research analyst scandal was laid bare in their own emails, discussed the ARS markets and their participation in it, in emails.

The WSJ article contains a number of very disturbing allegations regarding Merrill's conduct in influencing the analysts comments, but the most telling, for me at least, this is series of allegations:

Emails show increasing desperation by the sales force. On Nov. 26, Ms. Constable [a managing director in charge of Merrill's auction-rate securities desk] told an associate in an email that Merrill had to slash prices to sell its inventory of auction-rate securities: "The gloves are off and we are not concerned about issuer perception of [Merrill Lynch's] abilities and the competition. Gotta Move these microwave ovens!!"

Still, on Feb. 7, 2008, Mr. Conery [a research analyst]tried to reassure nervous brokers on another conference call, saying "I will tell you Merrill Lynch, certainly, by all indications, is committed to this product" and that the securities represent "a good, conservative, reasonable investment."

Six days later, the auction-rate securities market collapsed. Merrill declined to make any of the employees cited in the emails available for comment and none could be reached directly.

If true, Merrill is trying to dump its inventory, on its own customers, for fear of financial losses, and looking to transfer those losses TO ITS OWN CUSTOMERS. On February 7, 2008, it is telling its sales force that the securities are "a good conservative investment" and the market collapses the following week, undoubtedly because Merrill withdrew its support for the auctions.

It is the same allegation at UBS. Screw the brokers, screw the customers, we need to make money, and we are going to dump this crap on our customers.

"You and Us?" With friends like that............

And what is the state going to do about it? Basically nothing. The state is looking for fines, restitution and a censure.

How about putting Merrill out of business for its flagrant and ongoing abuse of the markets, and its customers. How about barring the executives who have engaged in this conduct - for life?

A fine? Merrill paid a BILLION DOLLAR fine and it doesn't phase them, they simply continue onward, acting in their own financial interest, with complete and utter disregard of the interests of their clients.

A fine will not do it. Suspend Merrill for 6 months. Bar the employees involved, and suspend the executives with the supervisory responsibility for this conduct.

That is what the regulators would do to any of the 5,000 small broker dealers in this country, why are we continuing to allow this flagrant abuse to continue?

UBS General Counsel Implicated in Auction Rate Securities Party

It seems that UBS just can't keep themselves out of the news. First the tax fraud investigation, then the Auction Rate Securities lawsuits, then the Massacheuttes Attorney General's suit, and the New York AG's suit.

Now this revelation from the Wall Street Journal -

Today, the WSJ’s Liz Rappaport reports that David Aufhauser, the former general counsel to the Treasury Department and the current GC for UBS’s investment-banking arm is at the center of the complaint that New York AG Andrew Cuomo recently filed against the Swiss bank for fraud in the ARS market.

Aufhauser (Wesleyan, Penn Law, Harvard MBA) is the individual described in Cuomo’s case against UBS as “Executive A,” the WSJ reports. The complaint, filed last week, alleges that he and six other UBS executives sold $21 million of their personal holdings in auction-rate securities in the months leading up to the market’s collapse, based on unique inside knowledge of the problems in the market. Aufhauser’s lawyer didn’t respond to requests for comment.

According to the article, UBS is denying any wrongful conduct:

A spokeswoman for UBS said: “As we have said previously, after an internal review assisted by independent external counsel, UBS does not believe there was any unlawful conduct by any employee in this matter.”

However, having your chief legal counsel identified as a participant in a fraud cannot be good for any brokerage firm; and in particular for one with as many black eyes as UBS.


Law Blog - WSJ.com : UBS General Counsel, Merrill, Implicated in Auction Rate Securities Party: "UBS General Counsel, Merrill, Implicated in Auction Rate Securities Party"

NY AG sues UBS for Securities Fraud

I have not seen the complaint yet, but according to the AP story, the complaint is similar to the one brought last month by the AG's office in Massachusetts.

The interesting part of this story is that the the NY AG - Andrew Cuomo is quoted as saying " UBS is not alone in this scheme." "We are looking at a number of other banks."

The AP is also reporting that investigators said they had identified several UBS employees who sold $21 million of their personal stakes in the market in the months leading up to its collapse, the lawsuit does not target individual executives. The story implies, but does not say, that the employees were selling their own auction rate securities, which if true, would be a severe blow to UBS.

The original UBS - Massachusetts post is here.

NY AG sues banking giant UBS for securities fraud:

Brokers Target of Criminal Investigation in ARS Scandal

First the State of Mass. went after UBS. Now Federal prosecutors are investigating whether two former Credit Suisse Group brokers lied to investors about how they placed their money into short-term securities.

Obviously the ARS issue is a hot topic, but I am concerned at the attempt to criminalize the conduct of individual brokers, when it appears that the ARS marketplace was as close to a fraud as one could imagine. Just read the emails that are attached to the UBS Complaint annd it becomes clear, assuming of course that the emails are accurate, that 1)the firms knew that the ARS market was collapsing in late 2007, and 2) they pushed brokers to move the securities out of the firm's inventory to its retail customers.

It is quite a stretch to hold the retail broker liable for the ARS debacle, as brokers are relying on their firms for the details of the securities that they sell. The rumors are that the brokers told their customers that the underlying securities were student loans, when in fact they were CDOs. The WSJ is making a big deal about that distinction, but IMHO, that is insignificant. Granted, CDOs carry more risk than student loans, but if that is the fraud, then prosecutors are going to walk away without a conviction, since the underlying securiteis are not in default, it is the auctions that failed, and those auctions failed regardless of the nature of the underlying paper.

OTOH, depending on how savvy the investor is, that distinction might just be material. I have a hard time believing that the average Joe, parking cash in an ARS knew or was concerned about the underlying paper, and therefore the elements of materiality and reliance would be missing from the criminal case.

Are we again going to see brokers taking the heat for a firm's fraud? Too many brokers were destroyed in the research scandal, and many fear the outlash against brokers for this debacle....even though most brokers who were involved with these securities knew as much about the underlying problems as their customers knew.

Of course, at issue is the $330 billion market for "auction rate" securities, which have now become illiquid.

UBS Charged With Fraud in Auction Rate Securities

Last week, the Massachusetts Securities Commission filed administrative proceedings against UBS Financial alleging that it defrauded its investors (and its own brokers) in connection with its sales of auction rate securities.

Of course, the Commission's complaint are only allegations, thus far unproven, and UBS has not yet responded to the compliant. However, if true, the allegations are serious, and provide significant insight into a corporate mindset at UBS which put its profits ahead of the well being of its customers, and its own employees.

At the same time, a brokerage firm is a business, and one of its businesses is buying and selling securities, often from its own inventory. However, the allegations of the complaint, and a reading of the emails, is a cause for concern.

Again, these are only allegations, and nothing has been proven, but the Commission alleges that UBS made material misrepresentations to its customers, and its brokers, regarding auction rate securities, and the viability of the entire concept. According to the Complaint, UBS senior management knew that the auctions were in trouble in late 2007, and embarked on a campaign to decrease its position in the securities, by selling those securities to their own customers, without disclosure of any of these issues to those customers.

These allegations will have a huge impact on the pending arbitrations that have been brought over auction rate securities, and on the untold number of cases that are being contemplated by law firms across the country. The allegations will have a significant impact for any customer who purchased the securities from UBS in 2008, as well as for the brokers who sold those securities.

The complaint is 110 pages long, and contains numerous attachments, of internal emails, is worth the time to review. The Commission has the complaint online, along with the exhibits.

Regulators Start Auction Rate Investigations

Auction rate securities are quickly becoming the next big retail investor problem. I am now getting calls almost daily from investors who say that they were sold the securities as an alternative to money market funds, and paid higher interest, and who now cannot sell their investments, which have become completely illiquid.

It will be interesting to see how these cases shake out - exactly what were investors told about these securities. One thing is certain - they were not told that they might be completely illiquid.

But that is where we are. Those investments that were the equivalent of money market funds cannot be sold. To add to the problem, UBS announced that it is going to mark down auction rate securities in its retail customer accounts on Monday - to reflect the lack of liquidity. The markdowns are reported to be up to 20% of the value of the security.

And now entering the fray is the State of Massachusetts, who is asking firms for information relating to the marketing of auction rate securities.

Hmmm, has the SEC and FINRA heard about this? Who reviewed those materials before they were distributed to investors?

Stay tuned, this is going to be big.

UBS, You Are Pissed At Us

That's a line from a recent auction rate securities article at Registered Rep Magazine. It seems that UBS is marking down the value of auction-rate securities held by individuals in their brokerage accounts. The markdowns are expected to be between 2 percent and 20 percent of the value of the securities.

More Trouble In Auction-Rate Securities Land