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May 10, 2011 > $91M settlement with UBS AG

$91M settlement with UBS AG

Submitted By Office of the Attorney General

Attorney General Kamala D. Harris announced on May 4, 2011, a $90.8M national settlement, which includes some $6.3M for California agencies, with the multinational Swiss bank UBS AG over allegations of anti-competitive and fraudulent conduct in the municipal bond derivatives industry.

"This financial fraud harmed school districts, cities, state agencies, and non-profit groups," Harris said. "The multi-million dollar settlement provides restitution to those victimized and sends a strong warning to anyone contemplating similar scams."

California participated with federal agencies and 24 other states in the negotiations that led to today's settlement. In addition to the approximately $6.3M in restitution, California will be entitled to a share of the $2.5M civil penalty and $5M in investigation costs that UBS has agreed to pay.

Under the settlement, UBS agreed to pay back a total of $90.8M to local and state agencies nationwide and non-profit groups that had municipal bond derivative contracts with UBS, or used UBS as a broker, between 2001 and 2004. That restitution is part of a $160M settlement package that includes federal agencies.

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 investigating allegations that certain large financial institutions, including national banks, insurance companies, 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 continuing, revealed collusive and deceptive conduct involving individuals at UBS and other financial institutions, along with certain brokers with whom they had working relationships. This 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.

Consequently, state, local and not-for-profit entities entered into municipal bond derivatives contracts on less advantageous terms than they would have otherwise.

Other states joining California in the settlement are Alabama, Colorado, Connecticut, District of Columbia, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Tennessee and Wisconsin.

The Attorney General's investigative team in the office's antitrust section included Senior Assistant Attorney General Kathleen Foote; Supervising Deputy Attorney General Natalie S. Manzo; Deputy Attorneys General Paula Lauren Gibson, Winston Chen and Ben Labow; Annette Goode-Parker, senior legal analyst; and Sheila Rhoads, legal analyst.

As a part of the same investigation, California reached a $67M multi-state settlement in December with Bank of America for illegal activity by some of its employees in investing the proceeds of municipal bonds. This activity amounted to bid rigging, price fixing and other anti-competitive practices that defrauded state agencies, local governments and non-profit groups. California's share was about $6M.

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