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For Immediate Release:  
For Further Information Contact:
January 12, 2006

Office of The Attorney General
- Peter C. Harvey, Attorney General
Bureau of Securities
- Franklin L. Widmann, Chief

 

Peter Aseltine
609-292-4791

 

Attorney General Peter C. Harvey Announces $50 Million Settlement with UBS Financial Services
Firm Will Pay New Jersey $25 Million for Alleged Failure to
Reasonably Supervise Brokers
Largest Securities Payment Ever for New Jersey

>> UBS Consent Order (1.38mb pdf) plugin

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.

>> UBS Consent Order (1.38mb pdf) plugin

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