The SEC, in coordination with the Justice Department, the IRS and 25 State Attorneys General, charged UBS Financial Services with fraudulent bid-rigging.  UBS is alleged to have fraudulently rigged at least 100 municipal bond reinvestment transactions in 36 states and generating millions of dollars in ill-gotten gains.  UBS Financial Services will pay $160 million in restitution and fines to settle SEC charges, as well as parallel cases brought by other federal and state authorities. 

In a related SEC enforcement action, former UBS officer Mark Zaino was barred from the industry.  Mr. Zaino assisted the regulators in their case against UBS.

        Focus of the Charges.   The fraudulent transactions took place after the municipalities offered and sold their securities to the public.  Before the money is used for the intended purposes, the municipalities most usually will temporarily invest the proceeds of the sales in reinvestment products.  Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value - and the most common way to establish FMV is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

        UBS's Various  Roles.   The SEC found that UBS played various roles in these tainted transactions.  The firm illicitly won bids as a provider of reinvestment products, and also rigged bids for the benefit of other providers while acting as a bidding agent on behalf of municipalities.  UBS at times additionally facilitated the payment of improper undisclosed amounts to other bidding agents.  In each instance, UBS made fraudulent misrepresentations or omissions, thereby deceiving municipalities and their agents. 

According to the SEC’s complaint, ...

UBS as a bidding agent steered business through a variety of mechanisms to favored bidders acting as providers of reinvestment products.  In some cases, UBS gave a favored provider information on competing bids in a practice known as “last looks.” In other instances, UBS deliberately obtained off-market ”courtesy” bids or arranged “set-ups” by obtaining purposefully non-competitive bids from others so that the favored provider would win the business.  UBS also transmitted improper, undisclosed payments to favored bidding agents through interest rate swaps.  In addition, UBS was favored to win bids with last looks and set-ups as a provider of reinvestment products.

In a related enforcement action, the SEC barred former UBS officer Mark Zaino from associating with any broker, dealer or investment adviser, based upon his guilty plea last year in a criminal case charging him with two counts of conspiracy and one count of wire fraud for engaging in misconduct in the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds.  The Commission recognizes Zaino’s cooperation in the SEC’s investigation as well as investigations conducted by other law enforcement agencies.

This is the SEC’s second settlement with a major bank in an ongoing investigation into corruption in the municipal reinvestment industry.  In December 2010, the SEC charged Banc of America Securities LLC with securities fraud for similar conduct.  In that matter, BofA agreed to pay $137 million in disgorgement, interest and fines to settle SEC and other federal and state charges. 

        SEC Staff Credits.   The investigation was conducted by Deputy Chief Mark Zehner, Assistant Muni Securities Counsel Denise Colliers, who work in the Philadelphia Regional Office.

The SEC’s investigation is continuing.  [SEC Release 11-105, 5/4/11]