Corporate Governance

From the Pages of The Pomerantz Monitor: UBS Pressured to Settle Auction Rate Securities Claims

By Carolyn Moskowitz

The September issue of The Pomerantz Monitor relays events that led UBS to enter into a global settlement with federal and state regulators over auction rate securities. UBS, the Swiss banking colossus with $1.9 trillion under management and over 80,000 employees worldwide, has been forced to write off close to $43 billion in the value of its debt portfolio. Its stock is down more than 50% this year. Its chairman, CEO and other senior executives have been forced out. And it is at the center of the auction rate securities debacle and a tax fraud investigation. On August 12, UBS announced that in the second quarter, its private-banking clients had withdrawn funds for the first time in eight years; and that it is cutting 5,500 jobs. UBS? wealth management advisors are reportedly defecting in droves. 

About 50,000 UBS customers are now stuck with $37 billion worth of auction rate securities. In order to settle a suit brought by the Massachusetts Attorney General, claiming that UBS misled investors about the safety and liquidity of those securities, UBS recently agreed to pay $4.4 million and announced it would buy back up to $3.5 billion of auction rate preferred stock sold by closed-end tax-exempt funds and held in UBS accounts as of that date.

The New York Attorney General (?NYAG?) filed a similar suit on July 24; on the same day, the Texas State Securities Board moved to suspend UBS? securities license in the state until UBS repurchases, at par, all auction rate securities it sold to Texas investors. In addition, the SEC was conducting an investigation into the auction rate securities crisis.

Finally, on August 8, UBS, under overwhelming pressure, entered into a global settlement with federal and state regulators in which it agreed to buy back nearly $19 billion of auction rate securities held by retail investors.

The New York action had the potential to be particularly embarrassing for UBS. The suit alleges that seven UBS executives unloaded a total of $21 million in auction rate securities in the months leading up to the market?s collapse, while the bank was telling customers that these securities were safe. Among the seven was David Aufhauser, general counsel for UBS? investment banking arm. The NYAG?s complaint references an email sent to Aufhauser, among others, anticipating the UBS pull-out from the auction market for these securities. Later that same day Aufhauser instructed his financial advisor to dump all his auction rate securities holdings. Aufhauser has now resigned.

UBS is also in the dock for supposedly helping thousands of wealthy investors from around the world hide their assets and income from tax collectors. On July 17, 2008, a Senate subcommittee released a 110-page report on ?Tax Haven Banks and U.S. Tax Compliance? that focused on UBS and LGT Group, the largest bank in Liechtenstein, a country which has been blacklisted by the Organization for Economic Cooperation and Development for past money laundering activities. The report concludes that, in order to recruit U.S. clients, UBS established an elaborate formal training program on such subjects as how to avoid surveillance by U.S. customs and law enforcement, and how to secretly move money in and out of the country.

Apparently the IRS caught on to UBS when it audited a billionaire from California and discovered some of the hidden assets. The billionaire pleaded guilty to tax evasion and informed against his former UBS private banker, Bradley Birkenfeld. When the IRS knocked on Birkenfeld?s door, he described to them the whole UBS tax evasion program.

On July 17, the same day that the subcommittee held hearings and released its report, UBS tried to head off the inevitable retribution by announcing that it would stop offering offshore banking services to U.S. clients and would cooperate with U.S. efforts to identify its 19,000 U.S. clients that it had previously failed to identify to the Treasury.

UBS? chagrin was no doubt exacerbated by its being lumped together with LGT. The taped testimony of the subcommittee?s chief witness against LGT, Heinrich Kleiber, was recorded in with his face in shadows and his voice disguised.

LGT reportedly got caught when Kieber, a lowly information technology employee and convicted felon, stole client account records in 2002 and sold them to the authorities. The German and British governments allegedly paid him a total of $7million for account records relating to their citizens. Several individuals are already being prosecuted for tax evasion, and more way be waiting for the other shoe to drop.

When the LGT scandal broke, Kieber received death threats from all over the world, and there is reportedly a $10 million price on his head. This, no doubt, reflects the type of clients LGT went out of its way to recruit. Interpol is reportedly hunting for him too. Kieber is now in hiding, with a new identity. ?He?s hunted, he?s wanted ? this is not what I would call living the good life,? said Jack A. Blum, Mr. Kieber?s lawyer. He may get to enjoy his $7 million, but we?re guessing that it won?t be any time soon.

Full post as published by PomTalk on September 09, 2008 (boomark / email).