Legal News

Auction-Rate Securities After-Party: Former UBS Exec Settles

By Amir Efrati

Two years ago, the New York white-collar defense scene was set ablaze by the auction-rate securities party.

The festivities included numerous press conferences at the New York attorney general’s office, and some press releases by the Securities and Exchange Commission (which aren’t quite as exciting), in which major banks who sold so-called auction-rate securities to clients agreed to buy back more than $60 billion of the stuff. It also led to criminal probes and charges.

The gist was this: the banks told buyers the securities could easily be sold, thanks to the credit crisis the market crashed and that was no longer the case. That’s when the regulators stepped in. (Extensive LB background here.)

UBS was one of the biggest ARS players and got the most scrutiny. The attorney general, Andrew Cuomo, sued the bank, which later settled the case and agreed to buy back nearly $20 billion ARS from clients.

Now comes resolution for David Shulman, who ran the auction-rate securities business for UBS. On Thursday he settled allegations of insider trading with Cuomo’s office, agreeing to pay $2.75 million. Here’s the settlement document.

He had been under criminal investigation by the Justice Department regarding the same conduct, people familiar with the matter have said.

According to the attorney general’s press release, between December 11 and December 13 of 2007, “Shulman learned that UBS's ARS program was in distress and that there was concern that upcoming auctions in student loan ARS could fail.”

Shulman owned $1.45 million in student loan ARS, which were scheduled to be sold in late December and early January. But before the auction date arrived, Shulman instructed his broker to immediately sell his holdings in student loan ARS, the attorney general said. It was the first and only time Shulman sold ARS between scheduled auctions.

In addition to paying the fine, Shulman is subject to a suspension from employment by a broker or dealer for 30 months, beginning from his July 2008 suspension by UBS and ending in January 2011.

Robert Anello, a lawyer for Shulman, told the Law Blog that “nothing in the findings or legal conclusions of the Attorney General should be construed as an admission by Mr. Shulman” and that he “is pleased to have closure on this issue.”

In 2008 Cuomo’s office reached a similar deal with the UBS’s then-general counsel who had to resign for similar conduct.

Full post as published by Law Blog - WSJ.com on February 18, 2010 (boomark / email).