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, including Luther Strange of Alabama. UBS had been charged with 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 announced the settlement with the firm, which left the municipal bond market in 2008.
Officials with the Justice Department said the anti-competitive behavior of the firm’s former officials occurred during a period from 2001 to 2006. The $160 million from the settlement will be divided as follows:
• $91 million will be paid to the states;
• $83 million of this money will serve as restitution to state agencies, nonprofits and other borrowers;
• $47.2 million will be paid to the SEC, which will pass that money on as restitution to the 100 muni issuers; and
• $22.3 million will go to the Internal Revenue Service.
UBS admitted and accepted responsibility for illegal, anti-competitive activity of former UBS executives in the municipal bond industry. It was alleged that 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.”
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. The SEC charged that “in each instance, UBS made fraudulent misrepresentations or omissions, thereby directly or indirectly deceiving municipalities and their agents.”
The issuers were located in Massachusetts, Colorado, Rhode Island, California, and New Jersey, among other states, according to the SEC. The former UBS officials 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 as 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. According to federal regulators their investigation is active and ongoing. The Justice Department has already indicted 18 individuals in connection with the probe. The enforcement action against UBS comes after Bank of America LLC, now Bank of America Merrill Lynch, agreed in December 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 the Justice Department in 2007 in return for fully cooperating with that Department’s antitrust probe and the parallel civil investigations.
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