UBS to Pay $160M to Settle Charges

WASHINGTON — UBS Financial Services Inc. has agreed to pay more than $160 million to settle antitrust, securities fraud, tax and other charges with three federal agencies and 25 state attorneys general for rigging bids for at least 100 reinvestment transactions in 36 states, threatening the tax-exempt status of more than $16.5 billion of municipal bonds.

Justice Department and Securities and Exchange Commission officials on Wednesday announced the settlement with the firm, which left the municipal bond market in 2008. A spokesman for the firm said its departure from the muni market had nothing to do with the investigation, which has been ongoing since 2005.

Justice officials said the anti-competitive behavior of the firm’s former officials occurred from 2001 to 2006.

The $160 million settlement amount includes: roughly $91 million that will go to the states ($83 million of which will serve as restitution to state agencies, nonprofits and other borrowers); $47.2 million that will go to the SEC, which will pass that money on as restitution to the 100 muni issuers; and $22.3 million that will go to the Internal Revenue Service.

The SEC also barred Mark Zaino, a former senior analyst who rose to become a director of UBS’ municipal reinvestment and external derivatives desk in New York City, from association with any broker-dealer or investment adviser. Zaino is permitted to reapply for a license however.

Zaino pleaded guilty a year ago to three criminal counts of conspiracy, conspiracy to restrain trade, and wire fraud and has been cooperating with the Justice Department’s antitrust investigation of the muni market. The department has filed charges against three other former UBS officials: Peter Ghavami, a managing director and co-head of muni bond reinvestment, and Gary Heinz and Michael Welty, who were vice presidents and marketers.

In announcing the settlement, assistant attorney general Christine Varney said UBS “admits, acknowledges and accepts responsibility for illegal, anti-competitive activity of former UBS executives in the municipal bond industry.”

Elaine Greenberg, chief of the SEC’s municipal securities and public pensions enforcement unit, said: “Our complaint against UBS reads like a 'how-to’ primer for bid-rigging and securities fraud.” Former firm officials “used secret arrangements and multiple roles to win business and defraud municipalities through the repeated use of illegal courtesy bids, last looks for favored bidders, and money to bidding agents disguised as swap payments.”

UBS said in a statement that it “is pleased to have resolved this matter with its regulators” and that “the underlying transactions were entered into in a business that no longer exists at UBS and involved employees who are no longer with the firm.” It also said that it has “cooperated fully” with the investigation and “does not endorse, ratify, or condone anti-competitive activity or other violations of law.”

UBS said its settlement with the IRS assures there will be no change to the tax-exempt status of bonds associated with muni investment and swap contracts because of the bid-rigging was conducted by the firm’s former officials.

The SEC said in its complaint, that between October 2000 through at least November 2004, UBS illicitly won bids for at least 22 muni reinvestment instruments, rigged at least 12 transactions while acting as bidding agents for contract providers, and submitted at least 64 “courtesy” or purposefully non-winning bids for contracts. It also, in at least seven instances, paid undisclosed kickbacks to bidding agents, purportedly for services rendered in connection with an interest rate swap, or on behalf of a winning provider of a contract, according to the commission.

“In each instance, UBS made fraudulent misrepresentations or omissions, thereby directly or indirectly deceiving municipalities and their agents,” the SEC said. The issuers were located in Massachusetts, Colorado, Rhode Island, California, and New Jersey, among other states, according to the SEC, which described some of the transactions but did not identify the issuers.

The former UBS officials, in essence, rigged the bids to make it seem like they were competitive when they were not. Under federal tax rules muni bond issuers are provided with a “safe harbor” that assures the prices of their investment contracts will be treated has having fair-market value if strict bidding rules are followed, including that at least three competitive bids be obtained for investment contracts.

The investments must be purchased at fair-market value to ensure the issuers have not earned illegal arbitrage profits — higher investment yields than bond yields — that could threaten the tax-exempt status of the underlying bonds.

Federal regulators said Wednesday that their investigation is active and ongoing. Justice has already indicted 18 individuals in connection with the probe, Varney said.

The enforcement against action UBS comes after Bank of America LLC, now Bank of America Merrill Lynch, in December agreed to pay more than $137 million to settle charges with the SEC, the IRS, the Federal Reserve and the Office of the Comptroller of the Currency, as well as 20 state attorneys general in connection with the investigation.

The bank was granted amnesty from criminal charges by Justice in 2007 in return for fully cooperating with that department’s antitrust probe and the parallel civil investigations.

The action also comes after the House Agriculture Committee yesterday voted to advance a bill that would delay the implementation of derivatives rules imposed by the Dodd-Frank Act until Dec. 31, 2012, after the next presidential election. Those rules, which were to be implemented this year, would subject muni and swap advisers, brokers and providers to Municipal Securities Rulemaking Board and Commodity Futures Trading Commission oversight. The federal regulators who announced the settlement would not comment on the impact of a delay in implementing those rules.

Patrick Temple-West contributed to this story.


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