UBS Financial Services, Inc. settled a bid rigging action
with the SEC related to the investment of municipal bond proceeds. SEC v.
UBS Financial services Inc., Civil Action No. 11-CV-2885 (D.N.J. May 4,
2011). This is the Commission's second recent settlement of a case based on
charges stemming from municipal bond reinvestment. The first was with Banc of
America Securities late last year (here).
The complaint in this case centers on the reinvestment of
the proceeds from the sale of municipal bonds from a period beginning over ten
years ago, that is, from 2000 through 2004. Between the time the bonds are sold
and the proceeds are used for the intended purpose the funds must generally be
invested at fair market value under the applicable IRS rules. This is
frequently done through a competitive bidding process.
UBS participated in this process in three capacities.
Each was tainted with fraud. First, the bank acted as a Provider. In this role
UBS placed bids which were offers to provide the specific reinvestment product
to the municipalities. In this capacity the bank sometimes won bids because it
had a "Last Look" - that is, it obtained information on the other bids of others.
In other instances the bank prevailed because the Bidding Agent deliberately
obtained off-market non-winning bids from others, typically called "Set-Ups."
In still other instances UBS secured the business because other provides
intentionally submitted sham off-market non-winning bids called "Courtesy
In some transactions UBS acted as the Bidding Agent. In
that capacity at times the bank arranged for Last Looks and Set-Ups for other
In other transactions, UBS acted as a Swap Counterparty.
In this role the bank would negotiate interest rate swaps with other providers
who won the bids to hedge against interest rate risks from the underlying
investments. In these transactions UBS was acting for its parent UBS AG. In
some of these transactions UBS facilitated improper and undisclosed payments to
the bidding agents from the winning provider.
The UBS business unit involved closed in 2008. Mark Zaino
at one point served as the director of that unit. The employees from the unit
are no longer with UBS.
Overall UBS is alleged to have rigged 100 municipal bond
reinvestment transactions in 36 states. The fraudulent actions included
illicitly winning at least 22 bids, as bidding agent rigging at least 12
transactions for others and in 7 transactions facilitated improper payments.
The complaint alleges violations of Exchange Act Section 15(c)(1)(A).
UBS settled with the Commission, consenting to the entry
of a permanent injunction prohibiting future violations of the Section cited in
the complaint. The bank also agreed to pay disgorgement of $9,606,5423 along
with prejudgment interest and a penalty of $32.5 million. The bank also agreed
to pay $113 million to settle parallel cases brought by other federal and state
a related administrative proceeding Mr. Zaino consented to the entry of an
order barring him from association with any broker, dealer or investment
adviser. In the Matter of Mark Zaino, Adm. Proc. File No. 3-14369 (May
4, 2011). That proceeding was based on a guilty plea entered by Mr. Zaino to
two counts of conspiracy and one count of wire fraud last year in U.S. v.
Zaino, No. 10-CR-00434 (S.D.N.Y.). Sentencing is scheduled for December
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