Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, May 5, 2011

UBS Settles Fraud Charges in Municipal Bond Derivatives Transactions with Governments and Nonprofits

The New York AG announced a multimillion dollar settlement with UBS for fraudulent and anticompetitive conduct in its municipal bond derivative transactions with governments and nonprofits across the country. UBS will pay $90.8 million as part of a coordinated federal and state enforcement agency settlement. Of that amount, $63.3 million will go to a multistate restitution fund for governments and nonprofits that entered into municipal derivatives contracts with UBS, or used UBS as a broker on such deals, between 2001 and 2004. 

The settlement follows an investigation led by the Attorneys General of New York and Connecticut, parallel with the U.S. Department of Justice and other enforcement agencies. Starting in 2008, the state authorities undertook a review of the municipal bond derivatives market, where tax exempt entities like governments and nonprofit organizations issue municipal bonds and reinvest the proceeds until the funds are needed or enter into contracts to hedge interest rate risk.

The investigation revealed conspiratorial and fraudulent conduct involving individuals at UBS, other financial institutions, and certain brokers with whom they had working relationships. Rather than establishing honest and fair terms of contract for the municipal derivative sales, certain UBS employees and their affiliates at other institutions rigged bids, submitted noncompetitive courtesy bids and fraudulent certificates of arms-length bidding to government agencies. The misconduct led local and state governments, municipalities, counties, government agencies and school districts, as well as nonprofits, to enter into municipal derivatives contracts on less advantageous terms than they would have otherwise.

The multistate settlement is the single largest component of coordinated settlements between UBS and the U.S. Department of Justice‚Äôs Antitrust Division, the Securities and Exchange Commission (SEC) and the Internal Revenue Service, as well as the states.  UBS is the second of several financial institutions involved in the ongoing municipal bond derivatives investigation to resolve the claims against it. Bank of America entered into a settlement in December 2010.

Pursuant to the state agreement, UBS will pay a total of $90.8 million. Governmental and nonprofit entities nationwide that entered into municipal derivative agreements with UBS between 2001 and 2004 will be entitled to $63.3 million in restitution from the state settlement. The agreement also provides that UBS will pay the states $2.5 million in penalties and $5 million in fees and costs of the investigation. UBS will pay another $20 million directly to other governments and nonprofits as part of its resolution with the SEC.

Other states joining New York in the UBS settlement include: Alabama, California, Colorado, Connecticut, District of Columbia, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Tennessee and Wisconsin.

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