UBS to Pay $50M to Settle CDO Charges


UBS AG agreed to pay $49.8 million to settle U.S. Securities and Exchange Commission charges it misled investors about a risky mortgage bond transaction that soured during the financial crisis, the regulator said on Tuesday.

The payment resolves a probe into a collateralized debt obligation (CDO) that the Swiss bank created in the middle of 2007, and which the SEC said caused $130 million of losses for outside investors when it was liquidated the following June.

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UBS' settlement is smaller than accords by rival banks such as Goldman Sachs Group Inc and Citigroup Inc to settle recent SEC probes into CDOs, which are typically backed by mortgages and other loans and sold in pieces to investors.

Those banks, like UBS, did not admit wrongdoing in agreeing to settle.

The SEC said UBS kept $23.6 million of cash it had received upfront while acquiring credit default swaps as collateral for the ACA ABS 2007-02 CDO, on top of a $10.8 million disclosed fee.

According to the regulator, UBS violated securities law by failing to disclose the upfront cash, and inaccurately representing its cost of acquiring the collateral.

One senior UBS banker said "let's see how much money we can draw out of the deal" early on in the structuring, the SEC said.

"UBS kept $23.6 million that under the terms of the deal should have gone to the CDO for the benefit of its investors," George Canellos, co-director of the SEC's enforcement division, said in a statement.

Megan Stinson, a UBS spokeswoman, said the accord concerns a business that was closed nearly five years ago. "We believe this settlement marks the conclusion of all SEC investigations relating to UBS' structuring and marketing of CDOs backed by residential mortgage-backed securities," she said.

No individuals were charged. The $49.8 million payment includes the upfront cash and disclosed fee, $9.7 million of interest and a $5.7 million fine.

Goldman paid $550 million in 2010 to settle with the SEC over the Abacus 2007-AC1 CDO, while the next year JPMorgan Chase & Co paid $153.6 million and Citigroup agreed to pay $285 million over other CDOs.

U.S. District Judge Jed Rakoff blocked the Citigroup settlement because he could not tell if it was fair or adequate. An appeal by both the SEC and Citigroup to revive the accord is pending before a federal appeals court in New York.

ACA Financial Guaranty Corp was the collateral manager that helped choose assets for the UBS CDO.

Former ACA executive Laura Schwartz testified for the SEC in its recent trial against former Goldman vice president Fabrice Tourre over the creation and marketing of the Abacus CDO. On Aug. 1, a Manhattan federal jury found Tourre liable for fraud.