(Bloomberg News) UBS AG, Switzerland's largest bank, agreed to pay $160.2 million to settle charges it rigged bids on at least 100 U.S. municipal-bond transactions that generated "millions of dollars in ill-gotten gains."
UBS will pay $47.2 million to settle Securities and Exchange Commission charges and $113 million to end cases brought by other federal and state authorities, the SEC said today in Washington. Some of the money will be returned to municipalities, the SEC said.
The settlement agreements, which involved 25 states, are part of criminal and civil investigations into a conspiracy by financial firms and municipal advisors to overcharge state and local governments for investment products. UBS's activity threatened the tax-exempt status of $16.5 billion of municipal bonds, the SEC said.
"Our complaint against UBS reads like a 'how-to' primer for bid-rigging and securities fraud," Elaine Greenberg, chief of the SEC's Municipal Securities and Public Pensions Unit, said in a statement. "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."
Four-Year Probe
The bank is the second to settle charges in the government's more-than-four-year antitrust investigation into bid rigging for investments states and cities make with proceeds from the $400 billion of bonds they sell yearly. Last year, Bank of America Corp. agreed to pay $137 million in restitution.
Localities routinely hire advisors to invest bond proceeds at the highest returns offered by banks and insurers until the money is needed for public works. The U.S. Justice Department alleges financial companies paid kickbacks to advisors to run sham auctions so they could win the public money to invest at below-market rates.
Prosecutors say bankers covered their activity by submitting phony bids in auctions won by their rivals and using separate derivative contracts to funnel payments to advisors.
The SEC's complaint said UBS illicitly won bids as a provider of municipal-bond investment contracts and also rigged bids for the benefit of other banks. In some cases, UBS gave favored banks information on competing bids when it acted as a broker, the SEC alleged, while in other cases it won bids after receiving inside information.
Former Employees
"UBS is pleased to have resolved this matter with its regulators," the Zurich-based company said in a statement. "The underlying transactions were entered into in a business that no longer exists at UBS and involved employees who are no longer with the firm."
UBS said the settlement costs were accounted for in previous quarters and won't affect future results.
Since October 2009, nine advisors to local governments and bankers working for financial firms including UBS, Bank of America and JPMorgan Chase & Co. pleaded guilty in the case. Nine others have pleaded not guilty and are fighting charges in court.
Last year, former UBS banker Mark Zaino pleaded guilty to fixing prices when brokering municipal-investment deals by submitting intentionally losing bids at auctions run by Los Angeles-broker CDR Financial Products. UBS allegedly entered into separate trades with another bank that were used to funnel kickbacks to CDR. Zaino agreed to cooperate in the investigation.
The Justice Department also indicted the former co-head of UBS's municipal derivatives group and two colleagues.
Co-Conspirators
The government has identified more than a dozen firms, including JPMorgan Chase, units of General Electric Co., and Societe Generale SA of France, as unindicted co-conspirators in the case against CDR, according to court records.
While competitive bidding is meant to ensure local governments get market rates on their investments, prosecutors say bankers and brokers carved up the market among themselves. The U.S. says that inflated their earnings at the expense of taxpayers and the Treasury, which is entitled to some investment earnings from tax-exempt bond proceeds.
The activity is similar to the so-called yield-burning cases of the 1990s, when banks faced allegations of overcharging local issuers for Treasury bonds they bought with bond money. Financial companies paid more than $170 million to settle SEC investigations into that case.