UBS SETTLES MUNY BID RIGGING CHARGES

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 Bids.”

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 providers.

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 authorities.

In 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 2011.

SEC PREVAILS IN COURT

The Commission has had mixed results in court in recent months. The agency has prevailed in some cases. In others it has lost. Some losses raise troubling questions about the program (here).

In SEC v. Radical Bunny, LLC, Case No. 2:09-cv-01560 (D. Ariz. Filed July 28, 2009) however the Commission prevailed on its summary judgment motion. The court found that the four individual defendants violated the registration, antifraud and broker dealer registration provisions of the securities laws. Those defendants are Tom Hirsch, a CPA, Berta “Bunny” Walder, a grade school principal, her husband Howard Walder, a pharmacist and Harish Shah, a CPA.

The complaint claimed that from late 2005 through June 2008 the defendants raised over $197 million from at least 900 investors through a nationwide offer of unregistered securities in the form of promissory notes or investment contracts. Many of the investors came from the accounting practice of defendants Hirsch and Shah. Investor funds were pooled and loaned to Mortgages, Ltd., a Phoenix based commercial lender which made short term high interest loans to real estate developers.

The securities were sold based on false representations and omissions according to the SEC. Specifically, the Commission claimed investors were told that Radical Bunny held a secured interest in Mortgages Limited’s assets despite the fact that their attorneys repeatedly told them there was no underlying documentation or it was defective. Investors were also told that the use of the loan proceeds was restricted to commercial development. In fact there were no restrictions on the use of the loan proceeds. Finally, investors were informed that the securities were not subject to the federal securities laws and that the defendants would carefully monitor their investments. Both claims were false. Indeed, attorneys for the defendants told them the securities were subject to the federal securities laws. Likewise, defendants were totally unaware of Mortgages Limited’s deteriorating financial condition and that most of Radical Bunny’s funds were being shifted to riskier projects to their detriment.

The final judgment entered in the case permanently enjoins each individual defendant from future violations of the registration, antifraud and broker dealer registration provisions of the securities laws. It also orders the payment of disgorgement by Mr. Hirsch of $1,245,220, by Mr. & Mrs. Walders of $1,245,217 and by Mr. Shah of $740,160 along with prejudgment interest. Each defendant was also ordered to pay a civil penalty of $120,000.

Radical Bunny, through its Chapter 11 trustee, consented to the entry of a permanent injunction which was entered by the court on November 4, 2009.