May 4, 2011
Jefferson City, Mo. – Attorney General Chris Koster today announced a multimillion dollar settlement with multinational Swiss bank, UBS AG, for anticompetitive and fraudulent conduct in the municipal bond derivative transactions across the country. Under the settlement agreement, UBS will pay $90.8 million as part of a coordinated federal and state enforcement agency settlement. Of that amount, $63.3 million will go to a multistate restitution fund for municipalities, counties, government agencies, school districts, and nonprofits that entered into municipal derivatives contracts with UBS, or used UBS as a broker on such deals, between 2001 and 2004.
Koster said that under the settlement with UBS, governmental and nonprofit entities nationwide that entered into municipal derivative agreements with UBS between 2001 and 2004 will be entitled to more than $63.3 million in restitution from the state settlement. The agreement also provides that UBS will pay the states $2.5 million in penalties, $5 million in fees and costs of the investigation, and another $20 million directly to other governments and nonprofits as part of its resolution with the Securities and Exchange Commission.
The state settlement with UBS is part of coordinated separate law enforcement and regulatory settlements that UBS entered into today with the U.S. Department of Justice’s Antitrust Division, the SEC, and the Internal Revenue Service. UBS is the second financial institution to settle with the 25-state working group in the ongoing municipal bond derivatives investigation.
“This settlement is part of our ongoing effort to return taxpayer money to those whom it was intended to benefit – the state agencies, municipalities, school districts, and not-for-profit entities that purchased the derivatives rather than the providers and brokers who engaged in this illegal scheme,” Koster said
“I also want to thank UBS for doing the right thing by cooperating with our investigation and providing meaningful restitution to those harmed,” Koster added.
Municipal bond derivatives are contracts that tax-exempt issuers use to reinvest the proceeds of bond offerings until the funds are needed, or to hedge interest rate risk. In 2008, a group of states began an investigation of allegations that certain large financial institutions, including national banks and insurance companies, and certain brokers and swap advisors, engaged in various schemes to rig bids and commit other deceptive, unfair, and fraudulent conduct in the municipal bond derivatives market.
The investigation, which is still ongoing, revealed collusive and deceptive conduct involving individuals at UBS and other financial institutions, and certain brokers with whom they had working relationships. The wrongful conduct took the form of bid-rigging, submission of non-competitive courtesy bids and submission to government agencies, among others, of fraudulent certifications of compliance with U.S. Treasury regulations. Regardless of the means used to perpetrate the schemes, the objective was to enrich the financial institution and/or the broker at the expense of the issuer, depriving the issuer of a competitive, transparent marketplace. As a result of such wrongful conduct, state, local, and not-for-profit entities entered into municipal derivatives contracts on less advantageous terms than they would have otherwise.