TRENTON
– Attorney General Peter C. Harvey
today announced that UBS Financial Services
Inc. (“UBS”) has reached a
voluntary settlement with New Jersey,
agreeing to pay $49,500,000 and implement
significant firm-wide reforms to resolve
allegations that it failed to reasonably
supervise financial advisers who market
timed mutual funds to the detriment of
shareholders.
Under
the agreement, UBS will make a settlement
payment to New Jersey of $24,750,000,
which represents the largest sum ever
collected by the State in a securities
matter, surpassing the record set by Attorney
General Harvey in 2004, when he reached
an $18 million settlement with Allianz
Dresdner Asset Management of America LP
and related companies over alleged market
timing. The payment to New Jersey includes
a civil penalty of $12,750,000 and an
additional $12 million for investigative
costs, investor education and other enforcement
initiatives.
The agreement settles allegations by the
New Jersey Bureau of Securities, within
the Attorney General’s Office (“the
Bureau”), that from September 1999
until at least December 2002, UBS failed
to reasonably supervise certain brokers
who engaged in deceptive market timing
activities that benefitted their customers
but harmed mutual funds and their long-term
shareholders.
“Our investigation revealed that
UBS Financial Services failed to reasonably
supervise certain brokers whose extensive
market timing activities violated the
policies of mutual funds and harmed smaller
investors in the funds,” said Attorney
General Harvey. “Certain of these
same brokers have been the subject of
prior enforcement action by our Office.
UBS deserves credit for entering into
this settlement, under which it will continue
to implement reforms to enhance supervision
of its brokers and to ensure compliance
with its own policies against market timing.”
New
Jersey worked cooperatively in this investigation
with the New York Stock Exchange. Under
the settlement, UBS will pay a total of
$49,500,000, with $24,750,000 going to
New Jersey and $24,750,000 going to the
Stock Exchange.
“This settlement follows an extensive
investigation by the New Jersey Bureau
of Securities in partnership with the
New York Stock Exchange,” said Franklin
L. Widmann, Chief of the Bureau of Securities.
“UBS has cooperated with our investigation
and has taken steps to better supervise
its financial advisers. Through investigations
such as this, we are achieving positive
reforms within the industry.”
The
Market Timing Conduct
Between September 1999 and December 2002,
UBS brokers allegedly completed more than
300,000 market timing transactions involving
mutual funds and the mutual fund sub-accounts
of variable annuities and other insurance
products. The alleged market timing activity
involved brokers in several UBS branch
offices, including the Paramus, N.J.,
office.
Market
timing involves making frequent trades
into and out of mutual funds to take advantage
of market fluctuations. Most funds have
policies against market timing, which
harms long-term investors by (1) allowing
the market timer to siphon off short-term
profits and dilute the value of the fund,
(2) increasing transactional costs of
the fund, and (3) making the fund more
difficult to manage.
UBS
subsequently conducted its own internal
investigation into market timing activities
by brokers at the firm and disciplined
certain brokers and their supervisors.
UBS also put into place a number of remedial
measures to enhance supervision of brokers
and to ensure that similar activity will
not recur. UBS, in entering this settlement,
neither admitted nor denied the Bureau’s
allegations.
UBS’s
Cooperation and Reforms
Under the agreement reached cooperatively
with UBS, the firm agreed to retain outside
counsel acceptable to the Bureau to perform
a review and to recommend, as necessary,
any additional procedures or policies
to ensure appropriate supervision of brokers
and maintenance of required books and
records. The Bureau alleged that UBS did
not maintain records of trading in the
mutual fund sub-accounts of variable annuities
or other insurance products. Within 90
days, UBS must provide written confirmation
to the Bureau that it has adopted and
implemented systems and procedures to
prevent recurrence of the types of supervision
failure and books and records violations
alleged by the Bureau.
Prior
New Jersey Securities Settlement Tied
to Certain Former UBS Brokers
Two of the market timing brokers in the
UBS Paramus office subsequently were employed
by Merrill Lynch Pierce Fenner & Smith
Inc., where their alleged market timing
activities were the subject of a $10 million
settlement that Attorney General Harvey
reached with Merrill Lynch in March 2005.
The
investigation was conducted for New Jersey
by Chief of Enforcement Richard Barry
and Investigating Attorneys James Monagle,
Julian Leone and Kevin O’Brien of
the Bureau of Securities. Julie Yoo assisted
in the investigation by the Bureau. Deputy
Attorney General Anna Lascurain, Chief
of the Securities Fraud Prosecution Section
of the Division of Law, and Deputy Attorney
General Joshua Rabinowitz handled the
case for the Attorney General.
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UBS
Consent Order (1.38mb pdf) plugin