UBS on Tuesday agreed to pay nearly $50 million to settle charges by the Securities and Exchange Commission that a brokerage unit violated securities laws while structuring and marketing a collateralized debt obligation (CDO) and by failing to disclose that it retained millions of dollars in upfront cash it received in the course of acquiring collateral for the CDO.
The SEC’s investigation found that UBS Securities, a brokerage unit of the Zurich-based parent bank, received $23.6 million in upfront payments in the process of acquiring credit default swaps (CDS) as collateral. Rather than transferring this cash to the CDO when the collateral was transferred, the SEC says that UBS retained the full amount of upfront payments in addition to its disclosed fee of $10.8 million.
George Canellos, co-director of the SEC’s Division of Enforcement, said in a statement that “UBS kept $23.6 million that under the terms of the deal should have gone to the CDO for the benefit of its investors.” In doing so, “UBS misrepresented the nature of the CDO’s collateral and rendered false the disclosures about how that collateral was acquired.”
Without admitting or denying the SEC’s findings, UBS agreed to pay disgorgement of the $23.6 million in upfront payments as well as the disclosed fee of approximately $10.8 million plus prejudgment interest of approximately $9.7 million and a penalty of $5.7 million.
Said the SEC: “Not only did UBS go on to market the deal using materials that omitted any reference to its retention of the upfront payments, but the materials inaccurately represented that the CDO had to acquire all collateral at either fair market value or the price it was acquired by UBS.”
This representation, the SEC says, was inaccurate because the CDO did not receive the $23.6 million in upfront cash kept by UBS as an additional undisclosed fee, and the collateral was not acquired at fair market value.