The Securities and Exchange Commission (SEC) announced today that it was charging UBS AG (US listing) (NYSE:UBS) with violating securities laws when the bank kept $23.6 million in upfront fees and withheld that information while structuring and selling a collateralized debt obligation (CDO).
UBS AG (NYSE:UBS) has agreed to pay a $50 million fine to the SEC and has agreed that the SEC can file an order that the bank violated Section 17(a)(2) and Section 17(a)(3) of the Securities Act of 1933, though UBS AG (NYSE:UBS) has not officially denied or admitted any wrongdoing. The $50 million is comprised of the $23.6 million that UBS kept, $10.8 million in other fees made off the deal, $9.7 million in interest, and a punitive fee of $5.7 million.
UBS AG plotted to draw money from the deal
The SEC quotes the head of UBS AG (NYSE:UBS)’s US CDO group as saying, “Let’s see how much money we can draw out of the deal,” and another department head called the deal an arbitrage opportunity, referring to the imbalance of information caused by UBS AG (NYSE:UBS)’s failure to disclose information about the deal. “From the outset, UBS AG (NYSE:UBS) employees working on the CDO intended for UBS to retain the upfront cash,” the SEC reported. “UBS employees discussed two ways to retain the upfront points: 1) contributing the upfront points to the CDO and arranging to have the CDO pay them back to UBS on a fully disclosed basis, or 2) simply keeping the upfront points without disclosing their retention to prospective investors.” UBS AG (NYSE:UBS) opted for the second option after discussing the issue with their in-house counsel, a decision that clearly violated industry norms.
No word yet on criminal charges
“UBS AG (NYSE:UBS) kept $23.6 million that under the terms of the deal should have gone to the CDO for the benefit of its investors,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “In doing so, UBS AG (NYSE:UBS) misrepresented the nature of the CDO’s collateral and rendered false the disclosures about how that collateral was acquired.”
The SEC’s press release avoided naming any individuals at UBS AG (NYSE:UBS) by name, preferring titles such as “the manager of UBS AG (NYSE:UBS)’s CDO syndicate book.” No word yet if any of the people who allegedly swindled investors will face criminal charges.
