Investor Lawyers Blog

A History of UBS Bad Bets

Published on: January 29, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The current quagmire of UBS Puerto Rico offloading billions of dollars in speculative Puerto Rico bonds onto its unsuspecting clients is by no means a new or limited occurrence for UBS. UBS has a history of taking huge gambles and often passing the bad bets onto its clients.

Between 2002 and 2007, UBS and its U.S. subsidiary UBS Real Estate Securities were issuing and underwriting massive amounts of investments backed by, and based upon, U.S. residential mortgages. In essence, UBS was bundling together groups of private mortgages where U.S. residents were buying or refinancing a home. UBS then turned around and sold those bundles to investors as safe and conservative investments, despite the fact that many of those loans carried tremendous risks and were very likely to default. All told, UBS faced potential liability approaching $45 billion in connection with this activity. Aside from the legal liability, UBS was also forced to write off approximately $50 billion in bad debt held in its own inventory in these securities.

In 2011, UBS lost another $2 billion as a result of a trader who was making massive bets trading in derivative securities. Generally speaking, derivatives are investments whose price is based upon the value of other securities. These include things such as futures, options, and swaps. All of these instruments are commonly considered high risk instruments. In this case, the UBS trader was betting on the direction that various exchange traded funds, or “ETFs” would go in the future. Except this trader was placing these bets on a massive scale with huge amounts of leverage, to the point that relatively small changes in the price of the ETFs resulted in massive losses to UBS.

Ex-UBS Global Wealth Chief Exposed by Whistleblower Pleads Not Guilty To Tax Fraud Conspiracy

Published on: January 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Raoul Weil, who previously served as head of UBS (UBS)’s Global Wealth Management division, has pleaded guilty to fraud conspiracy charges related to a US tax investigation probe involving the Swiss bank. Weil, 54, is accused of conspiring to help thousands of American citizens hide $12 billion at the bank.

Until his arrest last year, Weil was listed as a fugitive in the United States. In federal court in Florida, he was allowed a $10.5 million bond. His first court hearing will be in December. He has until February 12 to reverse his plea to guilty. If convicted, however, he could end up in prison for conspiracy to commit tax fraud for up to five years.

Weil was indicted because of information that UBS whistleblower Bradley Birkenfeld provided to the US Department of Justice and the Internal Revenue Service. The latter, also a former UBS banker, has since been awarded $104 million for helping the federal government start an international crackdown on tax evasion that wealthy Americans had been engaging in for decades through Swiss banks.

Lawyers Say Electronic Communication Retention Will Lead to More Securities Enforcement Actions

Published on: January 28, 2014 | by Shepherd Smith Edwards & Kantas, LLP

At a webcast on January 22, lawyers said that the electronic communication issues and the retention of e-mail would be a big part of broker-enforcement by Financial Industry Regulatory Authority and the SEC this year. E-mails are reportedly now a key factor in investigations by the two regulators. Also now subject to retention, supervision, and other requirements are instant messages and any other electronic communications and methods that brokerage firms us to dialog internally, as well as with customers and the public.

Last month, Barclays Capital agreed to pay a $3.75 million FINRA fine for allegedly not keeping all of its electronic messages and improperly storing records in a format that was non-rewritable. Barclays also purportedly did not keep over 3 million instant messages, which violates FINRA and SEC rules, and failed to retain email attachments. Earlier in 2013, LPL Financial (LPLA) was ordered by the SRO to pay $7.5 million for allegedly not adequately supervising e-mails.

Statistics show that electronic communications was the number one enforcement issue for FINRA last year. The self-regulatory organization’s amended Rule 8210 could also lead to additional litigation and enforcement actions over the books and records that it requests from firms and individuals. The change makes clear the degree to which FINRA can inspect and copy the records and books of associated persons and members and gives adjudicators the right to copy and inspect information that are under the control or custody of those that the SRO has jurisdiction over. Due to the fact that FINRA is not a governmental authority, firms are unable to invoke the Fifth Amendment regarding this matter. They also cannot formally oppose a Rule 8210 request to give over the material requested. Doing so can lead to possible disciplinary action.

UBS Bet on Puerto Rico and Lost Your Money

Published on: January 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The level of co-dependence between UBS Puerto Rico and Puerto Rico over the past several years is shocking. UBS Puerto Rico has been operating for almost 50 years. It has grown to the point that it manages almost as much money in Puerto Rico as every other brokerage firm combined. UBS Puerto Rico has simultaneously been a growing player with Puerto Rico’s government. Between 2008 and 2013, UBS helped Puerto Rico borrow over $13 billion for a variety of uses. This means that UBS Puerto Rico was involved in more of these bond offerings than the next three largest brokerage firms combined.

UBS Puerto Rico was also designated as the manager for Puerto Rico’s pension funds, which serve more than 200,000 current and retired government workers. This led to outrageous conflicts; UBS Puerto Rico underwrote bonds issued by Puerto Rico and backed by the pension system itself. UBS Puerto Rico then purchased approximately $1.5 billion of those very bonds for its proprietary investment funds. Those funds were in turn sold back to public investors. It would be surprising if the state pension did not own shares of these investment funds. So UBS helped create bonds to pay for government employee benefits, bought those bonds, and then sold those bonds back to the very same government employees who were supposed to be paid with the proceeds. UBS was loaning those employees their own money back, plus interest.

Similarly, UBS Puerto Rico was ignoring basic investment concepts like diversification. UBS Puerto Rico bragged that over 67% of its own assets were invested in Puerto Rico. Over half of the money investors had entrusted to UBS Puerto Rico were invested in UBS’s proprietary funds, the vast majority of which invested heavily, if not exclusively, in Puerto Rican debt. Many of those funds also were highly leveraged, meaning that they borrowed extra money to make even bigger investments. This greatly increases the risks of the investments.

Foreign Banks Soon Expected to Abide by US Rules

Published on: January 27, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Federal Reserve will soon likely finish the rules that would force big foreign banks to follow the same requirements as their US counterparts are have been abiding by ever since the Dodd-Frank Wall Street Reform and Consumer Protection Act. A number of these overseas banks are reportedly not happy with the crackdown.

Dodd-Frank was written so its rules regarding capital would also be applicable to foreign banks. But when the legislation became active, some of these foreign banks changed their American outfits’ legal status so that portions of the act no longer applied to them. This let them get out of having to put huge quantities of capital into their US units to meet the requirements of the law.

Since Congress made its huge overhaul of the financial system, Deutsche Bank (DB), Barclays, Credit Suisse (CS) and others haven’t had to comply with Dodd-Frank, which was supposed to enhance the financial buffer that banks have to keep up in the event of potential losses. (Because raising more capital may require selling new shares, can may weaken profitability measures.) Also, because certain banks have changed their legal status, it is now impossible for outsiders to obtain a clear understanding of their operations in the US.

JP Morgan VP Barred from Securities Industry By FINRA for Insider Trading Scam

Published on: January 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Financial Industry Regulatory Authority is barring J.P. Morgan Securities, LLC (JPM) vice president David Michael Gutman and ex-Meyers Associates LP Christopher John Tyndall from the securities industry for their alleged involvement in an insider trading scheme. According to the self-regulatory organization between March 2006 and October 2007, Gutman, who works in the firm’s conflicts office, improperly shared information with Tyndall that was non-public and material about at least 15 pending corporate merger and acquisition transactions

Tyndall then purportedly used the data to trade before at least six corporate announcements and recommended that customers and friends invest in the stock too. Tyndall and Gutman are longtime friends. The latter found out about the transactions from his job.

The inside information that Gutman provided Tyndall had to do with acquisitions involving Genesis HealthCare Corporation, American Power Conversion Corporation, First Data Corporation, Alliance Data Systems Corporation, SLM Corporation (Sallie Mae), and Cytyc Corporation. By settling, Tyndall and Gutman are not denying or admitting to the securities charges.

Ex-Oppenheimer Fund Manager to Pay $100K To Settle Private Equity Fund Fraud Charges

Published on: January 25, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Brian Williamson, a former Oppenheimer & Co. (OPY) portfolio manager, has consented to a securities industry bar and will pay $100,000 as a penalty to the Securities and Exchange Commission. The settlement resolves private equity fund fraud charges accusing him of making misrepresentation about one the value of one fund. In March, Oppenheimer paid over $2.8 million to settle SEC charges related to this matter.

According to the SEC, Williamson allegedly put out information that falsely claimed that the reported value of the largest investment of one of the funds came from the underlying fund’s portfolio manager when actually, Williamson as the manager of the funds, was the one who gave value to the investment. He purportedly marked up the value significantly higher than what the portfolio manager of the underlying fund had estimated. Williamson then gave prospective fund investors marketing collateral that included a misleading internal return rate that failed to subtract the fund’s expenses and fees. The Commission says Williamson made statements that were misleading and false to different parties to conceal the fraud.

The SEC’s order says that Williamson was in willful violation of sections and rules of the Securities Exchange Act of 1934, the Securities Act of 1933, and the Investment Advisers Act of 1940. The industry bar against him will run for at least two years. The ex-Oppenheimer fund manager consented to settle without deny or admitting to the securities charges.

Madoff Ponzi Scam Victims Win Right to Appeal for Interest

Published on: January 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

A group of investors that were victimized in the Bernard Madoff Ponzi scam has won the right to appeal directly to a federal court about a bankruptcy ruling that prevents them from factoring in the amount of time they invested with the financial fraudster as interest that they want back. According to the US Court of Appeals in New York, the plaintiffs met the criteria for a “direct appeal” so that they won’t have to go through the district court first.

U.S. Bankruptcy Judge Burton R. Lifland had said that “time-based” calculations might not be fair to creditors who are last in line for payments and that this could give a windfall to claims by traders even though they weren’t victims of Madoff’s scam. Lifland recently passed way.

Madoff’s victims want bankruptcy trustee Irving Picard to put aside about $1.4 billion to pay back interest they say they are owed. They believe that factoring in time when equating damages allows for inflation to be considered.

Family Pleads Guilty to $10M Massachusetts Ponzi Scam

Published on: January 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Steven Palladino, his wife Lori, and son Gregory have pleaded guilty to their involvement in a Massachusetts Ponzi scam that cost at least victims over $10 million, much of which can never be recovered. Defrauded investors included friends, acquaintances, and a veteran’s group.

In Suffolk Superior Court this week, Palladino pleaded guilty to criminal charges that implicated him as the lead player in the financial scheme, which he ran through Viking Financial Group. Lori and Gregory also entered their guilty pleas to charges related to the fraud.

Prosecutors claim the Palladinos promised high returns from high-interest, low-risk loans. The family used investors’ money to pay for a fancy lifestyle, including jewelry and expensive cars. Palladino also reportedly used some of the money for his mistress.

Goldman Sachs Must Contend with Proposed Class-Action CDO Lawsuit

Published on: January 22, 2014 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Judge Victor Marrero says that Goldman Sachs Group Inc. (GS) must face a proposed class action securities case accusing it of defrauding customers that purchased specific collateralized debt obligations at the beginning of the financial crisis. The lead plaintiff, Dodona I LLC, contends that the firm created two Hudson CDOs that were backed by residential mortgage backed-securities even though Goldman knew that subprime mortgages were doing badly.

The hedge fund claims that Goldman tried to offset its prime risk, even betting that subprime mortgages and the securities constructed around them would lose value—essentially making the CDOs to lower its own subprime exposure and simultaneously shorting them at cost to investors. Dodona purchased $4 million of Hudson CDOs.

Meantime, Goldman said that the proposed class action case should be dropped and that instead, Hudson CDO claims should be made independently. The bank said that the current case has too many conflicts and differences. Judge Marrero, however, disagreed with the bank.