UBS AG, Switzerland's largest bank, will pay almost $50 million to settle U.S. regulatory claims that a brokerage unit improperly retained millions of dollars of upfront cash it received while acquiring collateral for a financial product.
The Zurich-based bank's UBS Securities unit failed to tell investors in 2007 that it was keeping $23.6 million in payments rather than transferring it to the collateralized debt obligation (CDO), the Securities and Exchange Commission (SEC) said in an administrative order filed today.
The upfront payments "under the terms of the deal should have gone to the CDO for the benefit of its investors," George S. Canellos, co-director of the SEC enforcement unit, said in a statement. "UBS misrepresented the nature of the CDO's collateral and rendered false the disclosures about how that collateral was acquired."
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The settlement comes as the SEC wraps up its investigation of conduct and financial products that helped fuel the financial market turmoil of 2008. Probes of how banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. structured and sold CDOs linked to souring mortgages were the centerpiece of the agency's investigation of the credit crisis.
In mid-2007, UBS structured the CDO known as ACA ABS 2007-2, the collateral for which was primarily credit default swaps on subprime residential mortgage-backed securities, the SEC said. Instead of passing the upfront payments to the CDO as was standard industry practice, UBS retained them as an extra fee, according to the order.
In the settlement, UBS agreed to disgorge the $23.6 million in upfront payments and the disclosed fee of about $10.8 million, as well as paying prejudgment interest of approximately $9.7 million and a $5.7 million penalty, the SEC said. The company agreed to settle the agency's claims without admitting or denying wrongdoing.
"UBS is pleased to put this investigation behind us, which involved a legacy business that was closed almost five years ago," Megan Stinson, a UBS spokeswoman, said in an e-mail. "We believe this settlement marks the conclusion of all SEC investigations relating to UBS's structuring and marketing of CDOs backed by residential mortgage-backed securities."
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