UBS to pay $19.5 million to settle SEC charges over structured notes

By Wendy Van Sickle

Columbus, Ohio, Oct. 14 – UBS AG has agreed to pay $19.5 million to settle charges that it made false or misleading statements and omissions in offering materials provided to U.S. investors in structured notes linked to a proprietary foreign exchange trading strategy, according to a Wednesday press release from the Securities and Exchange Commission.

This was the SEC’s first case involving misstatements and omissions by a structured notes issuer, according to the release, which said many of the $40 billion to $50 billion of structured notes registered with the agency each year are “sold to relatively unsophisticated retail investors.”

UBS “agreed to settle the SEC’s charges that it misled U.S. investors in structured notes tied to the V10 Currency Index with Volatility Cap by falsely stating that the investment relied on a ‘transparent’ and ‘systematic’ currency trading strategy using ‘market prices’ to calculate the financial instruments underlying the index, when undisclosed hedging trades by UBS reduced the index price by about 5%,” the release stated.

According to the SEC’s order instituting a settled administrative proceeding:

• UBS perceived that investors looking to diversify their portfolios in the wake of the financial crisis were attracted to structured products so long as the underlying trading strategy was transparent. In registered offerings of the notes in the U.S., UBS depicted the V10 Currency Index as “transparent” and “systematic;”

• Between December 2009 and November 2010, approximately 1,900 U.S. investors bought approximately $190 million of structured notes linked to the V10 index;

• UBS lacked an effective policy to make the individuals with primary responsibility for drafting, reviewing and revising the offering documents for the structured notes in the United States aware that UBS employees in Switzerland were engaging in hedging practices that had or could have a negative impact on the price inputs used to calculate the V10 index;

• UBS did not disclose that it took unjustified markups on hedging trades, engaged in hedging trades with non-systemic spreads and traded in advance of certain hedging transactions;

• The unjustified markups on hedging trades resulted in market prices not being used consistently to calculate the V10 index. In addition, UBS did not disclose that certain of its traders added spreads to the prices of hedging trades largely at their discretion; and

• As a result of the undisclosed markups and spreads on these hedging transactions, the V10 index was depressed by about 5%, causing investor losses of approximately $5.5 million.

UBS did not admit or deny the SEC’s findings but agreed to cease and desist from committing any similar future violations, to pay interest of $11.5 million, to distribute $5.5 million of the disgorgement funds to V10 investors to cover the total amount of investor losses and to pay a civil monetary penalty of $8 million.

In deciding to accept the offer, the SEC said it considered UBS’ “substantial cooperation afforded its staff and certain remedial measures UBS implemented voluntarily.”

“It is critical that large global financial institutions have and implement policies and procedures designed to ensure that all facts relevant to investors are made known to individuals responsible for disclosures,” SEC chair Mary Jo White said in the release.

UBS is a Zurich-based bank.

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