UBS Misled CDO Investors, SEC Claims

August 7, 2013 ( – The SEC charged UBS for its failure to disclose that it retained upfront cash received when it acquired collateral for a collateralized debt obligation (CDO). 

The Securities and Exchange Commission (SEC) found in its investigation that, in the process of acquiring credit default swaps (CDS), UBS Securities received $23.6 million in upfront payments. UBS retained those payments in full, as well as its disclosed fee of $10.8 million, instead of transferring the cash to the CDO when the collateral was transferred.  

“UBS kept $23.6 million that under the terms of the deal should have gone to the CDO for the benefit of its investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement.  “In doing so, UBS misrepresented the nature of the CDO’s collateral and rendered false the disclosures about how that collateral was acquired.”

Charged with violating securities laws, UBS agreed to settle the SEC’s charges by paying disgorgement of the $23.6 million, the disclosed $10.8 million fee, prejudgment interest of approximately $9.7 million and a penalty of $5.7 million. UBS did not admit or deny the SEC’s findings, but consented to the entry of an order finding that it violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, and negligently caused ACA to violate Section 206(2) of the Investment Advisers Act of 1940.

According to the SEC’s order instituting settled administrative proceedings, UBS structured the CDO in mid-2007 with ACA Management as collateral manager. The CDO’s collateral consisted primarily of CDS on subprime residential mortgage-backed securities (RMBS), the CDO received monthly premiums from that collateral, and those premiums were then used to make required payments to CDO bondholders. 

The SEC’s order stated that ACA solicited bids on the CDS collateral through a running spread—periodic interest payments—and upfront cash payments, which combined to equal the yield on the CDS. 

UBS did not make any reference to the cash payments when it marketed the deal, and instead inaccurately represented that the CDO had to acquire all collateral at either fair market value or the price it was acquired by UBS—UBS did not acquire the collateral at fair market value, and the CDO did not receive the $23.6 million.