UBS AG (UBS) has agreed to pay $160.3 million in an effort to reach a settlement with the regulators over allegations related to its fraudulent activities associated with the municipal bond derivative market.
The settlement was reached between UBS AG and the Securities and Exchange Commission (SEC), the US Internal Revenue Service (IRS), US Department of Justice (DOJ) and a group of State Attorney Generals.
The allegations state that some former UBS AG employees were involved in rigged bids in the municipal bond market between 2001 and 2006. Their conducts were anticompetitive and fraudulent.
As per the settlement terms, UBS AG will pay $22.3 million to the IRS, $47.2 million to the SEC, and $90.8 million will be routed to the states. According to UBS AG, the underlyingtransactions were entered into an erstwhile business. The company also claimed to have made provisions for the settlement amount in the past quarters.
UBS AG is not the only company to have been charged with a fine related to issues of the municipal securities market. Last December, Bank of America Corp. (BAC) settled a similar allegation, shelling out $137 million as penalty.
Our Take
While the settlement is a relief to UBS AG, we believe that such penalty not only hampers the company’s financials but also its reputation. In the past, the global economic turmoil had a severe impact on the Swiss banking major’s balance sheet when the subprime crisis led to record losses.
Additionally, the issues emanating from the alleged tax evasion investigation and the dilution of Swiss banking secrecy significantly impacted UBS AG’s performance as worried clients looked for a safer refuge. Ultimately, the company agreed to transfer details of thousands of clients to the US authorities.
While in the recently reported first quarter 2011 results, UBS AG posted a surge in positive inflows, which increased its earnings sequentially, results were lower than the year-ago quarter.
Increasing profitability and inflows remain UBS AG’s priorities. The company has taken several restructuring initiatives, which should support its results in the upcoming quarters.
Yet we believe the volatile capital market conditions will restrict top-line growth to some extent in the near term. Additionally, UBS AG has been subject to stricter global banking rules following the financial crisis and the government bailout. To control risks, a trimming of its fixed-income business is also anticipated.
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