On August 6, 2013, the Securities and Exchange Commission ("SEC") brought an administrative proceeding against UBS Securities for violations of Section 17(a)(2) and 17(a)(3) of the Securities Act of 1933 ("Securities Act"). 15 USC 77q(a)(1) & (2). The alleged violation occurred during the structuring of a collateralized debt obligation ("CDO") when UBS failed to disclose that it retained millions of dollars in upfront cash obtained as a result of the acquisition of collateral for the CDO. The Press Release is here:
According to the Press Release, UBS structured a CDO that consisted of credit default swaps ("CDS") on subprime residential mortgage backed securities (RMBS). “The CDS essentially operated as a kind of insurance against certain defaults in the underlying RMBS.” In acquiring the CDS, the collateral manager received upfront payments of $23.6 million. The payments resembled “‘points’ like those on a mortgage." UBS, according to the Commission, retained the payments.
Marketing materials disclosed that UBS had received a $10.8 million fee but did not otherwise disclose the upfront payments. The SEC asserted that the practice resulted in a disclosure violation. As the press release stated:
- Not only did UBS go on to market the deal using materials that omitted any reference to its retention of the upfront payments, but the materials inaccurately represented that the CDO had to acquire all collateral at either fair market value or the price it was acquired by UBS. This representation was inaccurate because the CDO did not receive the $23.6 million in upfront cash kept by UBS as an additional undisclosed fee, and the collateral was not acquired at fair market value.
The primary materials for this case may be found on the DU Corporate Governance website.