UBS Agrees to Settle Federal Claims in Mortgage Case
BY BEN PROTESS
Arnd Wiegmann/ReutersUBS was linked to the recent civil trial of a former Goldman Sachs trader through ACA Management, a company that helped structure mortgage securities in 2007 for both banks.
UBS agreed on Tuesday to pay $50 million to settle federal accusations that it misled investors about a complex mortgage security, a transaction that loomed over the government’s recent legal battle with a formerGoldman Sachs trader blamed for his role in creating a similar security.
The Securities and Exchange Commission’s case against UBS, the giant Swiss bank, made a cameo appearance in the trial of the former Goldman trader, Fabrice P. Tourre, whom a jury found liable on six counts of civil securities fraud last week. ACA Management, a company that helped structure the mortgage securities in 2007 for both Goldman and UBS, linked the two financial crisis-era cases.
In Mr. Tourre’s case, the former trader was blamed for not warning ACA that a hedge fund involved in picking assets for the deal was also betting that it would fail. Two former top ACA executives testified on the S.E.C.’s behalf, contending that Mr. Tourre kept them in the dark about the hedge fund’s conflict of interest.
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In the UBS case, ACA provided the bank with about $23 million in upfront cash payments related to the mortgage deal. UBS pocketed the $23 million rather than sweeping it into the mortgage security, known as a collateralized debt obligation, or C.D.O. UBS marketed the deal, according to the S.E.C., “using materials that omitted any reference to its retention of the upfront payments,” making it an “undisclosed fee.”
“UBS kept $23.6 million that under the terms of the deal should have gone to the C.D.O. for the benefit of its investors,” George S. Canellos, the S.E.C.’s co-director of enforcement, said in a statement.
UBS did not admit or deny wrongdoing. In a statement, the bank said it was “pleased to put this investigation behind us, which involved a legacy business that was closed almost five years ago.” The bank further noted that the S.E.C. did not cite it for intentional or reckless misconduct.
For UBS, which has sent plenty of big checks to the government over the last five years, the $50 million penalty appears as something of a rounding error.
Last month, the bank agreed to pay $885 million to a federal regulator that accused it of selling toxic mortgage securities to Fannie Mae and Freddie Mac, the government-controlled housing finance giants. That penalty came on top of a $1.5 billion fine that the bank paid last year to global regulatory authorities to resolve its role in an interest-rate manipulation scandal. The bank also agreed to a $780 million fine in 2009 with United States authorities to settle charges that it helped American clients avoid paying taxes.
The settlement with the S.E.C. was another black mark for the bank. The S.E.C.’s civil order, citing internal UBS e-mails and phone recordings, depicted the bank’s zealous pursuit of profit as coming at the expense of investors.
The problem stemmed from 2007, the eve of the financial crisis, when the bank was starting the deal. Almost immediately, UBS employees working on the deal pursued upfront cash.
“Let’s see how much money we can draw out of the deal,” the head of the bank’s United States C.D.O. group said at the time, according to the S.E.C. And in a recorded call, when an ACA employee asked if there was “$20 million lying around,” a UBS employee responded: “We spent it already.”
In May 2007, according to the S.E.C., UBS employees debated how to keep the $23 million upfront cash payments obtained through ACA. After consulting with a UBS lawyer, the employees decided to retain the cash without disclosing it to investors, a decision that the S.E.C. called “inconsistent with the industry standard.”
The S.E.C. argued that the deception continued when UBS, along with ACA, prepared a list of assets in the deal. The list provided to investors “did not contain any reference” to the upfront payments. Instead, the marketing documents mentioned a $10.8 million fee that the bank collected. Despite ACA’s role in the deal, no one at the company has been charged, a fact that Mr. Tourre’s lawyers seized on at his three-week trial in Lower Manhattan.
The S.E.C. previously warned Laura Schwartz, one of the former ACA executives who testified against Mr. Tourre, that it might file civil charges against her. The agency, however, dropped the investigation weeks before Mr. Tourre’s trial. Mr. Tourre’s lawyers have argued that the S.E.C.’s decision might have colored her testimony against their client. The judge in the case, Katherine B. Forrest, was receptive to that concern, allowing Mr. Tourre’s lawyers to introduce the S.E.C.’s decision as evidence.
“The timing I find just too close to preclude entirely,” she said.
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