Published on:

SEC Charges UBS With Fraudulent Rigging of Municipal Bond Transactions

The SEC has charged UBS Financial Services Inc. (UBS) with fraudulently rigging more than one hundred municipal bond transactions.

UBS has agreed to pay $47.2 million to settle the transactions. The money will be returned to the impacted municipalities. UBS and its affiliates have further agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.

When investors purchase municipal securities, the municipalities typically temporarily invest the proceeds of the sales in reinvestment products before the money is used for the intended purposes. Under IRS rules, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process in which bidding agents search for the appropriate investment vehicle for a municipality.

But UBS’s fraudulent practices and misrepresentations undermined the competitive bidding process and affected the prices that municipalities paid for the reinvestment products being bid on by the provider of the products. Its fraudulent conduct at the time also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

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.

While the SEC has done a good job with this investigation and result, the magnitude of UBS’ illicit practices is further evidence that the major banks and wire houses are incented to engage in such practices until caught. This is one of many examples for the need for improved funding and resources in the area of securities regulation.