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UBS & PaineWebber Background Information

UBS AG is a global financial firm, headquartered in Switzerland. (AG is roughly the Swiss equivalent of Inc.) UBS apparently began in 1747, and went through a series of growth gyrations, primarily as Union Bank of Switzerland. It and its cross-town rival Credit Suisse have experience parallel growth, both in banking mergers and in recent purchases of U.S. investment banks which, for UBS, was PaineWebber.

William Paine and Wallace Webber founded an investment firm in Boston in 1880. Webber soon retired but William Paine remained at the helm until his death just weeks before the market crash in 1929. Son Ward Paine guided the firm through the depression years, before merging it with another New England firm in 1942, to form Paine, Webber, Jackson & Curtis. The brokerage firm grew to 4th largest in the U.S., but it was not until 1963, after the last Paine family manager had died, that the firm moved to New York.

In 1972, Paine Webber went public, and later acquired Mitchell Hutchins in 1977, Blyth, Eastman Dillon & Co. in 1979 and Kidder, Peabody & Co. in 1995. By late 2000, all such activities resulted in the firm remaining as the fourth largest of its kind the U.S., with 385 offices employing 8,554 brokers. UBS purchased PaineWebber that year and operated it as UBS/PaineWebber until 2003, when it dropped subtitles and changed all its operations to UBS. (When it dropped the PaineWebber name UBS reportedly wrote-off a billion dollars in goodwill.)

Piper Jaffray & Co. is a Minneapolis based brokerage firm founded in 1985, which flourished for over a century as a regional brokerage, offering a full range of financial services, and a second tier firm serving institutional investors. In 1999, it was acquired by U.S. Trust, regained its independence in 2003, then was acquired for $750 million by UBS in 2006. UBS thus gained 1,500 in staff, including 800 registered brokers.

The UBS trading floor in Stamford, Connecticut holds the Guinness World Record as the largest securities trading floor in the world. The 103,000 square-foot room is the size of three football fields and home to 1,400 traders and staff who handle about $1 trillion in transactions per day. Through loan default, UBS also owns UBS Polybahn, a rail system in Zurich.

UBS claims to be “the world’s largest manager of Private Wealth assets,” overseeing more than $3 trillion in assets. UBS operates worldwide with over 80,000 employees in 50 countries. In 2006 it reported profits of over $10 billion with shareholder’ equity of 47.850 billion Swiss francs (CHF) and market capitalization is 150.663 billion CHF. A Swiss franc is worth about $1.20.

Additional Information on UBS & PaineWebber
UBS’s Dillon Read Hedge Fund Debacle

In June 2006, UBS formed Dillon Read Capital Management, “an alternative investment management business”, i.e. hedge funds, to capture new business and retain the staff it was losing to other hedge funds. The CEO of UBS Investment Bank left to head DRCM.

UBS guaranteed a billion dollar bonus pool over the three years for new firm’s 120 employees to discourage defections (an average of $8 million each).

Reportedly, DRCM then lost $124 million in its first quarter and, on May 3, 2007 UBS announced the close of Dillon Read Capital Management due to “operational complexities.” UBS’s chief executive said it had also “under-appreciated the synergies of a proprietary trading operation being directly integrated into the investment bank”.

The Dillon Read CEO said that returns from the $3.5 billion proprietary fund were above plan for 18 months, until subprime problems surfaced in the first quarter of 2007. He added that DRCM also struggled to raise money from external investors, attracting only $1.2 billion for its first fund, which were returned to these investors.

UBS Fined $80 Million is Research Scandal

In perhaps the largest scandal to ever hit Wall Street, UBS and other huge firms were investigated, charged and fined record sums. Blatant conflicts of interest occurred as the firms established recommendations whether to buy, sell or hold stocks to get and keep investment banking clients rather than financial forecasts.

As the SEC and FINRA looked the other way, New York Attorney General Elliott Spitzer and other state regulators began the attack to sanction and fine firms for such practices.

The enforcement actions claim that, from approximately mid-1999 through 2001, the firms engaged in acts and practices that created or maintained inappropriate influence by investment banking over research analysts, thereby imposing conflicts of interest on research analysts that the firms failed to manage in an adequate or appropriate manner.

In addition, the regulators found supervisory deficiencies at every firm. The enforcement actions, the allegations of which were neither admitted nor denied by the firms, included additional charges that UBS Warburg received payments for research without disclosing such payments in violation of Section 17(b) of the Securities Act of 1933 as well as securities regulations and state statutes.

Former UBS Research Analyst Convicted

A former research analyst at UBS and a former executive director of a publicly listed firm were both found guilty of conspiracy in a Hong Kong district court.

According to a press release, the UBS banker accepted $1 million, as well as stock inducements, in return for issuing a favorable report on the company. The scheme reportedly involved other parties including a fund manager of ING Investment Management Asia Pacific, who earlier pleaded guilty to the charges.

Former UBS Research Analyst Convicted

A former research analyst at UBS and a former executive director of a publicly listed firm were both found guilty of conspiracy in a Hong Kong district court.

According to a press release, the UBS banker accepted $1 million, as well as stock inducements, in return for issuing a favorable report on the company. The scheme reportedly involved other parties including a fund manager of ING Investment Management Asia Pacific, who earlier pleaded guilty to the charges.

UBS Manager Arrested for Insider Trading

An executive director at UBS and his wife, also in the securities industry, were arrested and accused by federal prosecutors of selling confidential stock research over a five year period. He was allegedly the mastermind of an insider trading scheme in which he would tip off two traders of upcoming ratings changes on hundreds of stocks, allowing them to trade ahead of rating changes.

Reportedly, the now-suspended UBS banker pocketed more than $1 million in cash for “getting the inside dope from his perch on an elite committee at UBS that signed off on all upgrades and downgrades.” Many wonder how the former broker with a somewhat undistinguished career could have reached such a lofty position at UBS.

Prosecutors say the arrests of the UBS banker and 12 others is the largest insider trading scandal since the Ivan Boesky days of the late 1980’s, which was the subject of the movie “Wall Street.” The UBS banker pleaded not guilty to six counts of securities fraud and conspiracy and has posted a $500,000 bond.

UBS Fined $4.6 Mil for Mutual Fund Overcharges

The Securities and Exchange Commission (SEC) and FINRA announced disciplinary and enforcement actions against UBS and other firms, for causing their clients to pay higher than necessary commissions on mutual funds. The former PaineWebber unit was fined over $4.6 Million and told to amend its procedures. The firm consented to the sanctions without either admitting or denying its claims.

Many mutual funds charge sales commissions, which are paid to firms which sell the mutual funds. Front-end load funds, called “A-shares”, charge the loads when the funds are purchased. These funds almost always offer volume discounts when higher amounts are invested into a fund. Such volume discounts come at various levels of investment (examples: $10,000 or $100,000) which are called “breakpoints.”

Furthermore, mutual fund managers extend the breakpoints to include purchases made into a “family of funds”, so that diversification can be accomplished without missing available breakpoints. As well, funds managers allow time to meet breakpoints, usually a year, and even offer “letters of intent” so investors can get the discounts during that year.

Because breakpoints lower the commissions earned by salespersons, there is room for abuse, and regulators consider it a violation for registered persons to seek to avoid such discounts. The SEC and FINRA each brought cases against a group of firms which allegedly were allowing their representatives to violate the “break-point” rules.

The regulators determined that, during the time period investigated, in more than 30% of fund purchases at UBS, break point discounts were available but not utilized by its clients, costing these clients a collective total of $2.5 million. These overpayments were ordered to be refunded to these clients.

UBS to Pay 29 Mil for Discrimination & Harrassment

In one of the largest discrimination awards to a single plaintiff on record, a jury in New York ordered UBS to pay more than $29 million in damages to a former saleswoman who sued the company for sex discrimination.

Laura Zubulake was awarded $9 million in back pay and damage to reputation, plus $20 million in punitive damages after the jury held decided the bank discriminated against her as a woman, then fired her when she complained to the EEOC. “This sends a message not just to UBS but to everybody,” she said, and that women on Wall Street should “not to be afraid to stand up and speak out when they feel they are being treated differently.”

The plaintiff was a former institutional equities saleswoman at the company’s Stamford office, who convinced the jury her manager denied her important accounts and mocked her appearance to co-workers. Her claims also included sexist company policies, such as entertaining clients at strip clubs which made it difficult for women to socialize and foster business contacts with clients.

Important in the case was that, as have several other Wall Street firms, UBS failed to locate several incriminating e-mails, while Zubulake provided records of such evidence. She was thus able to prove UBS destroyed relevant e-mails after the litigation was filed. The judge therefore instructed the jury on an “adverse inference”, essentially telling the jury to assume the missing e-mails provided damning evidence against UBS.

Swiss Bank Historian Caught Destroying Records

In 1997, a night watchman at the Union Bank of Switzerland (as UBS was then known), found the bank historian destroying archives compiled by a subsidiary that had extensive dealings with Nazi Germany, in direct violation of a Swiss law adopted in1996 protecting such material.

UBS acknowledged that it had “made a deplorable mistake”, but maintained that the destroyed archives were unrelated to the Holocaust. However, the night watchman was suspended from his job at the security company that served UBS, following a criminal investigation into whether his whistle blowing had violated Swiss bank secrecy laws.

Shepherd Smith Edwards & Kantas LTD LLP Law Firm
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Our law firm represents institutional and individual investors nationwide who have lost a substantial portion of retirement or other assets. Our attorneys and staff have more than 100 years of combined experience in the securities industry and in securities law. Several of our lawyers served for years as Vice President or Compliance Officer of brokerage firms.

Each lawyer and staff member of our firm is devoted to assisting investors to recover losses caused by unsuitability, over-concentration, fraud, misrepresentation, self-dealing, unauthorized trades or other wrongful acts, whether intentional or negligent. We have handled thousands of cases against hundreds of large and small investment firms, including claims against UBS, PaineWebber Securities and Piper Jaffray & Co.

Call us at (800) 259-9010 or contact us through our Website to arrange a free confidential consultation with an attorney to discuss your or your company’s experiences with an investment advisor which led to losses in accounts.

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