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SEC Charges UBS with Fraudulent Bidding -UBS to pay $160 Million
FOR IMMEDIATE RELEASE
2011-105
UBS to Pay $160 Million to Settle Charges
Washington, D.C., May 4, 2011 — The Securities and Exchange Commission today charged UBS Financial Services Inc. (UBS) with fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.
Additional Materials
Administrative Proceeding
SEC Complaint (Mark Zaino)
UBS Transactions
To settle the SEC’s charges, UBS has agreed to pay $47.2 million that will be returned to the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.
When investors purchase municipal securities, the municipalities generally temporarily invest the proceeds of the sales in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.
The SEC alleges that during the 2000 to 2004 time period, UBS’s fraudulent practices and misrepresentations undermined the competitive bidding process and affected the prices that municipalities paid for the reinvestment products being bid on by the provider of the products. Its fraudulent conduct at the time also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted. The business unit involved in the misconduct closed in 2008 and its employees are no longer with the company.
According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, UBS played various roles in these tainted transactions. UBS illicitly won bids as a provider of reinvestment products, and also rigged bids for the benefit of other providers while acting as a bidding agent on behalf of municipalities. UBS at times additionally facilitated the payment of improper undisclosed amounts to other bidding agents. In each instance, UBS made fraudulent misrepresentations or omissions, thereby deceiving municipalities and their agents.
“Our complaint against UBS reads like a ‘how-to’ primer for bid-rigging and securities fraud,” said Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit. “They 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.”
According to the SEC’s complaint, UBS as a bidding agent steered business through a variety of mechanisms to favored bidders acting as providers of reinvestment products. In some cases, UBS gave a favored provider information on competing bids in a practice known as “last looks.” In other instances, UBS deliberately obtained off-market ”courtesy” bids or arranged “set-ups” by obtaining purposefully non-competitive bids from others so that the favored provider would win the business. UBS also transmitted improper, undisclosed payments to favored bidding agents through interest rate swaps. In addition, UBS was favored to win bids with last looks and set-ups as a provider of reinvestment products.
In a related enforcement action, the SEC barred former UBS officer Mark Zaino from associating with any broker, dealer or investment adviser, based upon his guilty plea last year in a criminal case charging him with two counts of conspiracy and one count of wire fraud for engaging in misconduct in the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds. The Commission recognizes Zaino’s cooperation in the SEC’s investigation as well as investigations conducted by other law enforcement agencies.
Without admitting or denying the allegations in the SEC’s complaint, UBS has consented to the entry of a final judgment enjoining it from future violations of Section 15(c) of the Securities Exchange Act of 1934. UBS has agreed to pay a penalty of $32.5 million and disgorgement of $9,606,543 with prejudgment interest of $5,100,637. The settlement is subject to court approval.
This is the SEC’s second settlement with a major bank in an ongoing investigation into corruption in the municipal reinvestment industry. In December 2010, the SEC charged Banc of America Securities LLC (BAS) with securities fraud for similar conduct. In that matter, BAS agreed to pay more than $36 million in disgorgement and interest to settle the SEC’s charges, and paid an additional $101 million to other federal and state authorities for its misconduct.
The SEC’s investigation was conducted by Deputy Chief Mark R. Zehner and Assistant Municipal Securities Counsel Denise D. Colliers, who are members of the Municipal Securities and Public Pensions Unit in the Philadelphia Regional Office.
The SEC thanks the Antitrust Division of the Department of Justice and the Federal Bureau of Investigation for their cooperation and assistance in this matter. The SEC is bringing this enforcement action in coordination with the Department of Justice, Internal Revenue Service and 25 State Attorneys General.
The SEC’s investigation is continuing.
# # #
For more information about this enforcement action, contact:
Elaine C. Greenberg, Chief of Municipal Securities and Public Pensions Unit and Associate Regional Director
Daniel M. Hawke, Regional Director
Mark R. Zehner, Deputy Chief, Municipal Securities and Public Pensions Unit
Mary P. Hansen, Assistant Regional Director
SEC’s Philadelphia Regional Office
(215) 597-3100
http://www.sec.gov/news/press/2011/2011-105.htm
Deutsche Bank Unit Stuffed Mortgage Reviews in a Closet. Literally
By Shira Ovide
Among the damaging charges in the government’s civil lawsuit against Deutsche Bank over its role in allegedly defrauding a government mortgage-insurance program, this charge is a standout.
According to the lawsuit, Deutsche Bank’s MortgageIT unit repeatedly lied to HUD about the quality of its mortgages. And of the more than 39,000 mortgages that Mortgage IT endorsed for HUD’s mortgage-insurance program, FHA, about one third of them defaulted. The government says that when an outside auditor showed MortgageIT its findings about serious problems in its mortgages, the auditor’s findings were literally shoved in a closet:
Government filings:
Thrivent sues lenders for ‘massive frauds’
Updated: April 30, 2011 – 4:58 PM
Countrywide and GMAC both say that Thrivent should have understood the risks of the mortgage-backed securities it bought.
Thrivent Financial for Lutherans has sued Countrywide Financial Corp. and GMAC Mortgage over what it describes as “massive frauds” in which it says it was duped into buying hundreds of millions of dollars in mortgage-backed securities.
Thrivent says it wanted conservative, low-risk investments and believed it was buying only those mortgages that carried the highest, AAA investment-grade ratings. But because Countrywide and GMAC failed to follow their underwriting guidelines, Thrivent says, it ended up holding higher-risk mortgages and has suffered huge losses amid the housing market collapse.
Between 2005 and 2007, the suit says, Minneapolis-based Thrivent and its affiliates paid hundreds of millions of dollars for 20 mortgage-backed securities offerings from Countrywide and for seven offerings from GMAC. The suit says that two firms either knew or recklessly disregarded the fact that the securities failed to meet the criteria for the AAA ratings they carried.
The firms say Thrivent should have known what it was getting into. “This suit represents an action by a sophisticated investor which had available to them offering materials and associated risks for their consideration,” GMAC Mortgage spokesman James Olecki said. “We intend to vigorously defend ourselves.”
Countrywide was bought in 2008 by Bank of America, whose spokeswoman, Shirley Norton, said Thrivent is a knowledgeable investor that is “looking to blame someone for investment losses incurred during a period of economic downturn.”
Mortgage-backed securities are bondlike instruments that trade in capital markets. They are made up of individual mortgages that are packaged together and sold in slices, or tranches, identified by their levels of estimated risk and potential reward.
The 127-page suit was filed in Hennepin County last month, but the defendants filed a petition this week to remove the case from Hennepin County to federal court.
Countrywide’s fraudulent marketing practices are well known, the suit says. It cites an $8 billion settlement agreement the company reached with various states, including Minnesota, and the fact that the U.S. Securities and Exchange Commission reached a settlement in October with three former executives.
Angelo Mozilo, Countrywide’s former CEO, agreed to pay $67.5 million in penalties and disgorgements. David Sambol, the firm’s chief operating officer, and Eric Sieracki, its chief financial officer, agreed to pay a total of $5.65 million. Mozilo and Sambol are each named as defendants in the Thrivent lawsuit.
As of January, 29 percent of the mortgage loans underlying Thrivent’s purchases from Countrywide were either in arrears, foreclosure, bankruptcy or repossession, and 23 percent of those purchased from GMAC were in similar straits, the suit says. As a result, the credit ratings of the certificates have been downgraded.
More than 95 percent of the Countrywide certificates and 85 percent of the GMAC certificates are rated as junk, the suit says. That means they can’t be sold for anything close to what Thrivent paid for them.
According to Thrivent’s lawsuit, in 2005 some 90 percent of Countrywide’s home loans were considered prime, meaning the borrowers were top credit quality and the mortgages were secured by first-position liens on single-family residences. Most were conforming loans, which have the lowest delinquency rates in the industry.
But in the rush to increase market share, the suit says, Countrywide disregarded its underwriting guidelines, pressured appraisers to provide inflated valuations, and made more loans to higher-risk borrowers. Thrivent says Countrywide kept the best-quality mortgages for itself and dumped the riskier loans onto Thrivent and others.
Thrivent made similar allegations against GMAC, citing a number of confidential witnesses who had worked for the company.
Thrivent seeks unstated compensatory and/or rescissionary damages, punitive damages and costs.
Dan Browning • 612-673-4493
Since August 2007, which marked the beginning of the “foreclosure crisis”, MainStreet has provided guidance, direction and peace of mind to over 150 families. These families are from every walk of life and each of their mortgage situations is as unique as each individual tied to it. MainStreet Resolutions is Your Path to A Fresh Start!
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According to the Center For Responsible Lending, (CRL) October 2010 Policy Brief, “To date, 2.5 million homeowners have already lost their homes and another 5.7 million are at imminent risk of foreclosure. Looking ahead, independent analysts have projected that between 10 and 13 million foreclosures will have occurred by the time the crisis abates.”
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HOST
Tiffany L. Arthur
Direct: 954-639-0003 xt 4
Fax: 954-342-2330
www.MainStreetResolutions.com
RSVP TO: tiffanylarthur@aol.com
EVENT INFO:
5:30 til ???
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(954) 568-4443
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