UBS’s Ill-Fated Quest for Financial Glory

February 14th, 2013 by Phil Mattera

UBSUBS seems to be in the news these days more often in connection with its legal problems than in its role as a major financial services company.

This is a result both of some dubious cases brought against it and numerous instances of serious misconduct on the part of the Swiss company. UBS, after all, a corporation that not long ago had to pay $1.5 billion to settle charges that it helped manipulate the LIBOR interest rate index.

In the dubious category is a case brought by a group of its U.S. customers who tried to collect damages from the bank after it had revealed their secret accounts and they had to pay hefty penalties to avoid tax evasion charges for unreported income. A U.S. appellate court in Chicago recently upheld a lower court’s dismissal with a ruling that was, in more than one sense, dismissive. U.S. Circuit Court Judge Richard Posner wrote that UBS “has no duty to treat [the plaintiffs] like children or illiterates, and thus remind them that they have to pay taxes on the income on their deposits.” Posner went on to state: “This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel.”

This is not to say that UBS was blameless. The lawsuit came after a former UBS banker turned whistleblower had revealed how the bank actively assisted wealthy Americans seeking to hide income from the IRS. Federal prosecutors targeted UBS, which in 2009 had to pay $780 million and sign a deferred prosecution agreement to settle criminal charges of having defrauded U.S. tax authorities.

The feds then pressured UBS to hand over account information on more than 50,000 U.S. customers. UBS and the Swiss government, seeking to retain the country’s tradition of bank secrecy, resisted but in the end agreed to spill the beans on a smaller group of depositors. Using that information, the IRS went after a bunch of those tax dodgers, some of whom then foolishly thought they could use the courts to get UBS to cover their tax bills.

UBS recently prevailed in another lawsuit filed in response to a different instance of its misconduct. In 2004 the U.S. Federal Reserve fined the bank $100 million for violating U.S. trade sanctions by engaging in currency transactions with parties in countries such as Iran and Libya. Based on that, a group of Americans who had been injured in Hamas and Hezbollah attacks while in Israel sued UBS in 2008 under the Anti-Terrorism Act, arguing that the bank was liable for damages in light of its dealings with Iran, which is said to back those groups. The U.S. appeals court in New York has just upheld a dismissal of the case, though it ruled that the trial judge was wrong in holding that the victims lacked standing to bring the action in the first place.

UBS’s success in these two cases pales in comparison to the damage that its reputation has suffered both from the larger matters that prompted them and from a series of other scandals that have embroiled the company through most of the 15 years since it was created from the merger of two of Switzerland’s three big banks: Swiss Bank Corporation and Union Bank of Switzerland.

After the deal was completed, UBS’s chief executive at the time, Marcel Ospel, set out on an ambitious mission to make the company the world leader in investment banking. It was an ill-fated quest.

When UBS sought to increase its U.S. presence with the acquisition of brokerage house PaineWebber, it inherited a slew of legal problems relating both to PaineWebber’s own deceptive practices in the sale of limited partnerships and those the U.S. firm in turn took on when it bought Kidder Peabody, including a scandal in which a trader fabricated $350 million in trading profits to hide what were actually huge losses.

UBS’s U.S. operation was later caught up in the controversy over conflicts of interest between research and investment banking (UBS paid $80 million as its share of the settlement) and was sued by several U.S. state governments relating to its sale of auction-rate securities. UBS settled the actions by agreeing to pay a total of $150 million in penalties to the states and buy back more than $18 billion of the securities.

After getting bailed out to the tune of some $65 billion by the Swiss government during the financial meltdown in 2008, UBS had to pay $160 million to settle federal and state charges relating to bid-rigging in the municipal securities market. Just after that, UBS was sued by the Federal Housing Finance Agency in an action seeking to recover more than $900 million in losses suffered by Fannie Mae and Freddie Mac from mortgage-backed securities purchased through UBS. (The case is pending.)

UBS faced criticism in 2011 after it came to light that a young trader named Kweku Adoboli working in the bank’s London offices had racked up more than $2 billion in losses. Adoboli was later found guilty of fraud and sentenced to seven years in prison, while UBS was fined £29 million by British regulators for supervisory failures.

And late last year, there was the resolution of the LIBOR manipulation case. In addition to the $1.5 billion in penalties, a Japanese subsidiary of UBS pleaded guilty to a charge of felony wire fraud in U.S. federal court. (By having a foreign subsidiary take the fall, UBS shielded its U.S. operations.) The repercussions of the LIBOR case did not disappear. During a subsequent hearing on the matter in the British Parliament, several former UBS executives were accused of “gross negligence and incompetence.” So much for the dream of financial glory.

Note: This piece draws from my new Corporate Rap Sheet on UBS, which can be found here.

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