UBS Settles Over Market Timing Activity

by Glen Shapiro, LawAndTax-News.com, New York

16 January 2006

UBS announced last week that UBS Financial Services Inc. has reached a settlement agreement with the New York Stock Exchange, the State of New Jersey and the State of Connecticut with respect to certain short-term trading activity between 2000 and 2002 by clients of several UBS financial advisors.

As part of the settlement agreement, UBS has agreed to pay $54 million, of which $18 million will be set aside for potentially affected investors and $16 million for investor education and securities-enforcement initiatives.

However, the investment bank has neither admitted nor denied the allegations.

Speaking with regard to the settlement agreement, Richard G. Ketchum, the NYSE's chief regulatory officer observed that:

“When a brokerage firm permits a hedge fund or any other market participant to trade deceptively and gain an unfair advantage over other investors, it has violated the trust that forms the foundation of our capital markets. UBS’s failure to have adequate controls in place led to this unfortunate occurrence.”

According to the New York Stock Exchange, beginning January 2000 and continuing through December 2002, brokers in at least seven UBS branch offices engaged in deceptive market-timing to benefit their customers, typically hedge funds, to the detriment of the affected mutual funds and their non-market-timing shareholders.

The brokers used deceptive trading practices to conceal their identities, and those of their customers, to enable them to trade in mutual funds that sought to limit or curtail their market-timing.

These practices included the use of multiple branch wire code prefixes, multiple broker identification numbers, multiple customer accounts, and the brokers’ use of “under the radar” trading to avoid notice by mutual funds. Typically, mutual funds screened for market-timing trades only above a designated dollar amount. The practice of “under the radar” trading refers to splitting one trade into numerous smaller ones to avoid detection by mutual funds.

UBS has reportedly agreed to retain an outside law firm to review its procedures relating to relating to supervision and the maintenance of books and records, and to have that report submitted to NYSE Regulation and the Firm’s Board of Directors.

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