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.