CHARGES BROUGHT AGAINST 4 INDIVIDUALS FORMERLY OF UBS IN ALLEGED $3.5 BILLION SUB-PRIME BOND SCHEME

The following excerpt is from an e-mail sent out by the Securities and Exchange Commission

"Washington, D.C., Feb 1, 2012 – The Securities and Exchange Commission today charged four former veteran investment bankers and traders at Credit Suisse Group for engaging in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis.

The SEC alleges that Credit Suisse’s former global head of structured credit trading Kareem Serageldin and former head of hedge trading David Higgs along with two mortgage bond traders deliberately ignored specific market information showing a sharp decline in the price of subprime bonds under the control of their group. They instead priced them in a way that allowed Credit Suisse to achieve fictional profits. Serageldin and Higgs periodically directed the traders to change the bond prices in order to hit daily and monthly profit targets, cover up losses in other trading books, and send a message to senior management about their group’s profitability. The SEC alleges that the mispricing scheme was driven in part by these investment bankers’ desire for lavish year-end bonuses and, in the case of Serageldin, a promotion into the senior-most echelon of Credit Suisse’s investment banking unit.

“The stunning scale of the illegal mismarking in this case was surpassed only by the greed of the senior bankers behind the scheme,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “At precisely the moment investors and market participants were urgently seeking accurate information about financial institutions’ exposure to the subprime market, the senior bankers falsely and selfishly inflated the value of more than $3 billion in asset-backed securities in order to protect their bonuses and, in one case, protect a highly coveted promotion.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Serageldin oversaw a significant portion of Credit Suisse’s structured products and mortgage-related businesses. The traders reported to Higgs and Serageldin. As the subprime credit crisis accelerated in late 2007 and 2008, Serageldin frequently communicated to Higgs the specific profit & loss (P&L) outcome he wanted. Higgs in turn directed the traders to mark the book in a manner that would achieve the desired P&L. However, under the relevant accounting principles and Credit Suisse policy, the group was required to record the prices of these bonds to accurately reflect their fair value. Proper pricing would have reflected that Credit Suisse was incurring significant losses as the subprime market collapsed.

The SEC alleges that the scheme reached its peak at the end of 2007, when the group recorded falsely overstated year-end prices for the subprime bonds. Just days later in a recorded call, Serageldin and Higgs acknowledged that the year-end prices were too high and expressed a concern that risk personnel at Credit Suisse would “spot” their mispricing. Despite acknowledging that the subprime bonds were mispriced, Serageldin approved his group’s year-end results without making any effort to correct the prices. When the mispricing was eventually detected in February 2008, Credit Suisse disclosed $2.65 billion in additional subprime-related losses related to the investment bankers’ misconduct.

The SEC’s complaint alleges that Serageldin, Higgs, and the traders Faisal Siddiqui and Salmaan Siddiqui violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 10(b) and 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5 12b-20 and 13a-16 thereunder.

Under the SEC’s Statement on the Relationship of Cooperation to Agency Enforcement Decisions (Seaboard Report) and the Enforcement Division’s Cooperation Initiative, entities can benefit from acting swiftly to detect, report, and remediate misconduct and cooperate robustly with the SEC’s investigation. The SEC’s decision not to charge Credit Suisse was influenced by several factors, including the isolated nature of the wrongdoing and Credit Suisse’s immediate self-reporting to the SEC and other law enforcement agencies as well as prompt public disclosure of corrected financial results. Credit Suisse voluntarily terminated the four investment bankers and implemented enhanced internal controls to prevent a recurrence of the misconduct. Credit Suisse also cooperated vigorously with the SEC’s investigation of this matter, providing SEC enforcement officials with timely access to evidence and witnesses. The SEC’s investigation also was assisted by cooperation provided by Higgs, Faisal Siddiqui, and Salmaan Siddiqui.

The SEC’s investigation was conducted by Staff Accountant Kenneth Gottlieb, Senior Counsel Kristine Zaleskas, Senior Specialized Examiner Michael Fioribello, Assistant Regional Director Michael Paley, and Assistant Regional Director Michael Osnato, Jr. in the SEC’s New York Regional Office. Senior Trial Counsel Howard Fischer will lead the SEC’s litigation efforts.

The SEC thanks the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and United Kingdom Financial Services Authority for their assistance in this matter."

SEC CHARGES UBS FINANCIAL INC. WITH RIGGING MUNI BOND TRANSACTIONS

The following is an excerpt from the SEC web site:
“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.
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 charges 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 2000 to 2004, 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 this 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. As bidding agent UBS 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.
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.
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.
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’s investigation is continuing.
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.”