True, the SEC also had UBS write out a fat check as supposed punishment but, frankly, such payments seem to have become just another balance sheet item - just another datapoint in the cost of doing business. There just doesn't seem to be anything in the quiver of Wall Street's regulators that provokes enough fear among the regulated big boys so as to give them pause before they engage is bad deeds. Unfortunately, as this article will demonstrate, the feds seem to be doing everything possible to avoid such a consequence.
No Action - Boy, you said it!
Well, okay, sure, you're right, I sort of put my own little cynical twist on this No-Action Letter story. Perhaps, that's not particularly fair. As such, let me quote the precise words of the Division in its letter to UBS's outside law firm Debevoise & Plimpton LLP (some salutation and nonessential words deleted). NOTE: You can read the full text HERE:
Re: SEC v. UBS Financial Services Inc., Civil Action No. 11-2539 (D. N.J.) Waiver Request under Regulation A and Rule 505 of Regulation D
This responds to your letter dated today, written on behalf of UBS Financial Services Inc. and constituting an application for relief under Rule 262 of Regulation A and Rule 505(b)(2)(iii)(C) of Regulation D under the Securities Act of 1933. You requested relief from disqualifications from exemptions available under Regulation A and Rule 505 that arose by reason of the Judgment as to UBS Financial Services Inc. filed on May 6, 2011 and entered on May 9, 2011 by the United States District Court for the District of New Jersey in SEC v. UBS Financial Services Inc., Civil Action No. 11-2539 (the "Judgment"). The Judgment permanently restrains and enjoins UBS Financial Services Inc. from violating, directly or indirectly, Section 15(c) of the Securities Exchange Act of 1934 by means of a manipulative, deceptive or other fraudulent device or contrivance, and orders it to disgorge profits gained as a result of the conduct alleged in the complaint to have violated said Section 15( c) and pay a civil penalty in the amount of $32,500,000.
For purposes of this letter, we have assumed as facts the representations set forth in your letter and the findings supporting entry of the Judgment. We also have assumed that UBS Financial Services Inc. will comply with the Judgment.
On the basis of your letter, pursuant to delegated authority, I have determined that you have made showings of good cause under Rule 262 and Rule 505 that it is not necessary under the circumstances to deny the exemptions available under Regulation A and Rule 505 by reason of entry of the Judgment. Accordingly, UBS Financial Services Inc. is granted relief and the disqualifications from such exemptions that arose by reason of entry of the Judgment are waived.
We're Sorry - Okay?
Now, you might ask what prompted the SEC to issue its No-Action Letter and permit the exemptions to remain in place for UBS, notwithstanding that the firm seems to have engaged in serious misconduct. If you want to debate me as to whether the cited violations were "serious," how about we just agree to characterize the case as one that warranted a $32.5 million settlement?
Again, at the risk of being accused of slanting the story, let me simply cite the exact words of the letter from UBS's outside counsel to the Division:
Dear Mr. Laporte:
We submit this letter on behalf of our client, UBS Financial Services Inc. (the "Settling Firm"),1 the settling defendant in the above-captioned civil proceeding, which was filed on May 4, 2011.
The Settling Firm hereby requests, pursuant to Rule 262 of Regulation A and Rule 505(b)(2)(iii)(C) of Regulation D of the Securities and Exchange Commission (the "Commission") promulgated under the Securities Act of 1933 (the "Securities Act"), waivers of any disqualifications from exemptions under Regulation A and Rule 505 of Regulation D that may be applicable to the Settling Firm or any other person as a result of the entry of a Judgment against the Settling Firm (the "Judgment"), which is described below. The Judgment was issued on May 6, 2011 and entered into the docket on May 9, 2011.2 The Settling Firm requests that these waivers be granted effective as of the date of
1 The Settling Firm was known as UBS PaineWebber during a large portion of the time period during which the allegations described below occurred.
2 Securities and Exchange Commission v. UBS Financial Services Inc., Case No. 11-cv-2539-WJM (D. NJ. May 6, 2011).
the Judgment. It is our understanding that the Staff of the Division of Enforcement (the "Staff') does not oppose the grant of the requested waivers.
The staff of the Division of Enforcement engaged in settlement discussions with the Settling Firm in connection with the above-captioned civil proceeding, which was brought alleging violations of Section 15(c) of the Securities Exchange Act of 1934 (the Ď"Exchange Act"). As a result of these discussions, the Settling Firm submitted an executed Consent of the Defendant UBS Financial Services Inc. (the Ď"Consent") when the Commission filed its complaint against the Settling Firm in a civil action. In the Consent, solely for the purpose of proceedings brought by or on behalf of the Commission or in which the Commission is a party, the Settling Firm agreed to consent to the entry of a final judgment as described below, without admitting or denying allegations made in the above-captioned proceeding.
The allegations in the proceeding relate to the conduct of certain former employees of the Settling Firm with respect to the temporary investment of proceeds of municipal securities in reinvestment products such as guaranteed investment contracts, repurchase agreements, and forward purchase agreements. Beginning in 2000 and continuing through 2004, the former employees are alleged to have participated in conduct in connection with the competitive bidding for these products that involved the steering of business to the Settling Firm and the submission of purposefully non-winning bids in the Settling Firm's capacity as a reinvestment provider, and the steering of business to other firms in the Settling Firm's capacity as a bidding agent. These practices are alleged to have affected the prices for certain of the reinvestment products at issue and the certifications required under applicable Treasury regulations.
The Judgment, among other things, restrains and enjoins the Settling Firm and its agents, servants, employees, attorneys and all persons in active concert or participation with them who receive actual notice of the Judgment from violating, directly or indirectly, Section 15(c) of the Exchange Act. Additionally, pursuant to the Judgment, the Settling Firm was ordered to pay disgorgement of and prejudgment interest of $14,707,180.00 to the Commission as well as a civil penalty of $32,500,000.00.
The Settling Firm understands that the entry of the Judgment against it could disqualify it and other persons from participating in certain offerings otherwise exempt under Regulation A and Rule 505 of Regulation D promulgated under the Securities Act, insofar as the Settling Firm was disqualified pursuant to 17 C.F.R. §§ 230.262(a)(4) or (b )(2). The Commission has the authority to waive the Regulations A and D exemption disqualifications upon a showing of good cause that such disqualifications are not necessary under the circumstances. See 17 C.F.R. §§ 230.262 and 230.505(b)(2)(iii)(C).
The Settling Firm requests that the Commission waive any disqualifying effects that entry of the Judgment against it may have under Regulation A and Rule 505 of Regulation D with respect to the Settling Firm and other persons on the following grounds:
1. The Settling Firm's conduct addressed in the Judgment and alleged in the Complaint does not relate to offerings under Regulation A or Rule 505 of Regulation D. Furthernore, we note that the conduct occurred over five years ago, the personnel at the Settling Firm who were involved in the violations alleged in the Complaint are no longer employed by the Settling Firm, and the business unit in which the former employees were employed was closed by the Settling Firm in June 2008.
2. The Settling Firm has cooperated with the Division of Enforcement in the investigation of this matter and agreed to injunctive relief and monetary payments.
3. The disqualification of the Settling Firm, its affiliates or other persons from the exemptions under Regulation A and Rule 505 of Regulation D would be unduly and disproportionately severe given that the Judgment fully addresses the activity alleged in the Complaint through injunctive and other relief.
4. The disqualification may affect the business operations of the Settling Firm, its issuer affiliates, and third party issuers by impairing their ability to issue securities pursuant to these exemptions to raise new capital or for other purposes. In addition, the disqualification may place the Settling Firm or its affiliates at a competitive disadvantage with respect to third parties.
In light of the grounds for relief discussed above, we believe that disqualification is not necessary, in the public interest, or for the protection of investors, and that the Settling Firm has shown good cause that relief should be granted. Accordingly, we respectfully request the Commission to waive, effective as of the date of the Judgment, the disqualification provisions in Regulation A and Rule 505 of Regulation D to the extent that they may be applicable as a result of the entry of the Judgment. 3
3 We note in support of this request that the Commission has in other instances granted relief under Rule 262 of Regulation A and Rule 505(b)(2)(iii)(C} of Regulation D for similar reasons. See, e.g., Citigroup Inc., SEC No-Action Letter (pub. avail. Oct. 19,2010); Evergreen Investment Management Co., LLC, SEC No-Action Letter (pub. avail. June 8, 2009); UBS AG, SEC No-Action Letter (pub. avail. Mar. 19,2009); Citigroup Global Markets, Inc., SEC No-Action Letter (pub. avail. March 23, 2005); Morgan Stanley & Co. Incorporated, SEC No-Action Letter (pub. avail. Feb. 4, 2005); Lehman Brothers Inc., SEC No-Action Letter (pub. avail. Oct. 31, 2003); Citigroup Global Markets Inc., flklal Salomon Smith Barney Inc., SEC No. Action Letter (pub. avail. October 31,2003); and Credit Suisse First Boston Corporation, SEC No-Action Letter (pub. avail. Jan. 29, 2002).
Now Do You Get It?
Just how serious was the underlying SEC case against UBS? Consider this opening paragraph in the SEC's Complaint:
1. This case involves various fraudulent bidding practices by UBS, a registered broker-dealer, involving the temporary investment of proceeds from the sale of tax-exempt municipal securities in certain reinvestment products by state and local governmental entities in the United States ("Municipalities"). As described below, UBS's fraudulent practices and misrepresentations both affected the prices of the reinvestment products and jeopardized the tax exempt status of the underlying municipal securities, thereby injuring numerous Municipalities. During a time period of over four years, UBS rigged at least 100 transactions, generating millions of dollars in ill-gotten gains, and threatening the tax status of over $16.5 billion of underlying municipal securities.
Last year, I wrote what I think can be fairly characterized as a snide commentary about another DOJ/Antitrust Division settlement, that one with Bank of America: The Department of Justice Headline About Bank of America (Street Sweeper, December 8, 2010). In reacting to another multi-million payment (here it was described as "restitution") that settled another antitrust case, I didn't pull my punches:
Don't get me wrong - in theory I get the whole idea about encouraging the race to be the first to sing to the prosecutors. The problem with theory is that it doesn't always match up with reality. If smaller corporations and individual crooks were also greeted with the same milk-and-cookies, that would be fine. However, these leniency programs have an odd way of seeming to perversely reward big corporations - even if that reward is little more than the convenience of writing out a check and being the subject of a fairly benign headline in a press release. I fully appreciate that this apparent settlement benefits victims of the underlying misconduct, but I'm hardly convinced that putting more bucks into the spendthrift coffers of government agencies is necessarily the best solution.
All of which brings us back to my historic criticism of this failed regulatory approach that allows humongous corporate defendants to pay their way out of trouble but with little consequence beyond that cost. You think that in the UBS case there's much remorse? You think that a smaller brokerage firm would get the same treatment?
Making the Point(s)
In point #1 as quoted above from UBS's letter to the Division, UBS's outside counsel says that:
Furthermore, we note that the conduct occurred over five years ago, the personnel at the Settling Firm who were involved in the violations alleged in the Complaint are no longer employed by the Settling Firm, and the business unit in which the former employees were employed was closed by the Settling Firm in June 2008.
Wow - I mean, seriously, could it be any plainer?
This misconduct is in the past - not really an issue for us today. After we got caught, we sort of dumped those key employees involved - isn't that enough to get us off the hook? Oh, and another thing, the unit that was involved, well, you know, we closed it. So, fuggedabout all the antitrust bid rigging stuff. Can't we just call it all even and let us continue with our Reg. D and A offerings to our clients?
Perhaps in keeping with the theory that it's best to pile this stuff higher and deeper, UBS advances even more reasons why the SEC shouldn't punish it by denying the offering exemptions. UBS argues in point #2 that it cooperated with the SEC (oh my, shades of Bank of America's cooperation with DOJ) and actually paid the money that it had agreed to pay in order to settle the matter to begin with. I think the legal word for this is the Latin term chutzpah.
Further, UBS complains in points #3 and #4 that not giving it a fast-track for Reg. A and D deals would hurt - it would be a very severe punishment. Dare I say even more harmful than the millions of settlement dollars? Did any of you regulators note that?