UBS Settles With DOJ And SEC, Ending Its Cross Border Tax Driven Business

The SEC filed a settled civil injunctive action yesterday against financial giant UBS. The SEC action alleges violations of Section 15(a) of the Exchange Act and Section 203(a) of the Investment Advisers Act for respectively, acting as an unregistered broker-dealer and investment advisor, the case centers on tax evasion. SEC v. UBS AG, Case No. 1:09-CV-00316 (D.D.C. Filed Feb. 18, 2009). The focus of the inquiry is defined in an information unsealed by the Department of Justice which alleges that UBS conspired to defraud the U.S. by impeding the IRS.

The SEC’s complaint alleges that from 1999 through 2008 UBS acted as an unregistered broker dealer and investment adviser to thousands of U.S. persons and offshore entities with U.S. citizens as beneficial owners. The firm held billions of dollars worth of assets for these clients. This business was conducted primarily through client advisers usually located in Switzerland. These advisers periodically traveled to the U.S. to meet with clients. As a result of these operations, which UBS attempted to conceal, the company had revenues which ran from $120 to $140 million per year.

According to the Department of Justice, the scheme centered on efforts by UBS to impede the IRS. After the bank purchased Paine Webber in 2000, the firm entered into an agreement with the IRS which requires it to report IRS income and other identifying information for its U.S. clients who held U.S. securities in a UBS account. UBS was also required to withhold income taxes from U.S. clients. UBS evaded these obligations, assisting U.S. taxpayers with the opening of new UBS accounts in the names of nominees and sham entities. U.S taxpayer assets were then transferred to the newly created accounts which were not identified as those of U.S. taxpayers. UBS took steps to conceal these activities and the U.S. taxpayers involved filed false tax returns.

UBS settled with the SEC and DOJ. With the SEC, the firm consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 15(a) and Section 203(a) of the Investment Advisers Act. UBS also agreed to pay $200 million in disgorgement, to be paid together with an additional $180 million in disgorgement that will be paid in the criminal case. The firm also agreed to terminate its U.S. cross-border business and to retain a consultant to conduct an examination of its termination of that business.

With DOJ, the firm entered into a deferred prosecution agreement. As part of its agreement, UBS, based on an order by the Swiss Financial Markets Supervisory Authority, agreed to identify its cross-border customers and terminate the business. The company also agreed to pay $780 million in fines, penalties, interest and restitution.

Another Lesson In The Hallmarks Of Fraud

An action brought on Tuesday by the SEC should remind investors — and perhaps regulators — of the fundamental lesson of the Madoff scandal: if it’s too good to be true, it probably is. SEC v. Stanford International Bank, Case No. 3-09CV0298-L (N.D.Tex. Filed Feb. 17, 2009).

In Stanford International, the SEC alleged that the defendants committed an $8 billion fraud which apparently has gone on for years. The defendants are Robert Allen Stanford, Stanford International Bank, an Antigua based company, Stanford Group Company, a Houston-based broker-dealer and investment adviser and Stanford Capital Management, an investment adviser. The court granted a temporary freeze order at the SEC’s request.

The scheme alleged by the SEC is a familiar one. It had two key facets. In the first, the company sold “certificates of deposit” to investors. They promised “high return rates that exceed those available through true certificates of deposits offered by traditional banks.” Those returns were achieved through what was supposed to be a unique investment strategy. It yielded double-digit returns over the past 15 years, according to defendants.

The second part of the scheme is similar. Since 2005, SGC advisers sold more than $1 billion of the Stanford Allocation Strategy, a so-called proprietary mutual fund wrap program. This program was marketed based on false investment data.

In its complaint, the SEC details a number of facts about the operations of the defendants which should serve as “red flags,” not just to the SEC but also to the investing public. Those include:

• Claimed returns year after year which exceed those of other similar investments;

• A unique investment strategy;

• “Safe” investments because investor money is primarily in “liquid” investments;

• Virtually nobody knew the details of the operation — here only two people — making the operation a kind of “black box;” and

• No real oversight — the long standing auditor is retained based on a “relationship of trust with the defendants.”

Not all of these warning signs would be readily known to public investors. The first three are however: Returns others cannot achieve; a unique strategy and complete safety. These should be enough to warn off investors, not draw them in. The others should be readily apparent to any regulator conducting an investigation. When coupled with the first three investigating regulators should be off putting together an enforcement action to protect the public. Hopefully this repetition of the Madoff badges of fraud will serve as a reminder to investors to avoid the “too good to be true” investments.