Management Directions to Protect UBS’s Reputation Caused False Submissions
As set forth in the Order, with the onset of the global financial crisis, the media focused on the financial well-being of the world’s major financial institutions and analyzed LIBOR submissions, among other market indicators, to ascertain a panel bank’s strength and ability to borrow funds. Questions arose in the media about the integrity of the panel banks’ submissions. In response, from early August 2007 to at least mid-2009, certain managers in UBS Group Treasury and Asset and Liability Management (“ALM”) issued directions to UBS’s submitters to tailor UBS benchmark interest rate submissions to ward off negative public and media perceptions about UBS. These directions, at times, resulted in false submissions for U.S. Dollar LIBOR, LIBORs for other currencies, Euribor, and Euroyen TIBOR, because the submissions did not solely reflect UBS’s assessment of the borrowing costs of unsecured funds in the relevant interbank markets, as required.
At first, in August 2007, the management directions were to “err on the low side” of panel bank submissions. UBS’s U.S. Dollar LIBOR submissions immediately moved to the lowest quartile of panel submissions and remained there for a sustained period. UBS continued to make low submissions that suggested it could borrow at such low rates even though at the same time it was suffering from negative credit events such as reporting negative revenues in October 2007, a significant write down of assets in December 2007, losses in the first quarter of 2008, and a credit rating downgrade. As one senior UBS employee commented at the time, “senior management want to show the world we are the strongest bank with loads of liquidity.”
In April 2008, after the Wall Street Journal questioned the integrity of low submissions by the panel banks, such as UBS, managers in Group Treasury and ALM directed that UBS’s submissions be made “in the middle of the pack” of panel banks submissions. That direction was followed and, at times, enforced, notwithstanding disagreement or resistance on some occasions by the submitters. From June 2008 through at least the first half of 2009, UBS’s submissions were in the “middle of the pack” virtually every day, even after events suggesting that the submissions should have been higher, such as UBS’s receipt of more than $125 billion in infusions and loans from the Swiss government and the Swiss National Bank, and from liquidity programs of the U.S. Federal Reserve Bank, and the Bank’s $7.59 billion loss in the fourth quarter of 2008.
UBS’s Obligations to Ensure Integrity and Reliability of Benchmark Interest Rates
In addition to the $700 million penalty, the CFTC Order requires UBS to implement measures to ensure that its submissions are transaction-focused, based upon a rigorous and honest assessment of information, and not influenced by conflicts of interest. See pages 60-73 of the CFTC’s Order. Among other things, the Order requires UBS to:
- Make its submissions based on certain specified factors, with UBS’s transactions being given the greatest weight, subject to certain specified adjustments and considerations;
- Implement firewalls to prevent improper communications including between traders and submitters;
- Prepare and retain certain documents concerning submissions, and retain relevant communications;
- Implement auditing, monitoring and training measures concerning its submissions and related processes;
- Make regular reports to the CFTC concerning compliance with the terms of the Order;
- Use best efforts to encourage the development of rigorous standards for benchmark interest rates; and
- Continue to cooperate with the CFTC.
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The CFTC Order also recognizes the cooperation of UBS with the Division of Enforcement in its investigation, as of late December 2010.
In related matters concerning the U.S. Justice Department, UBS Securities Japan Co., Ltd., agreed to plead guilty to a criminal charge of wire fraud, UBS AG agreed pursuant to a non-prosecution agreement to continue to cooperate with the Justice Department, and UBS AG and UBS Securities Japan Co., Ltd. agreed to make payments that when combined total $500 million. In addition, the United Kingdom’s Financial Services Authority (“FSA”) issued a Final Notice regarding its enforcement action against UBS AG and has imposed a penalty of £160 million, the equivalent of $259.2 million, against the Bank; the Swiss Financial Market Authority (“FINMA”) issued an order resolving proceedings against UBS AG and requiring disgorgement of 59 million Swiss Francs, the equivalent of $64.3 million.
The CFTC thanks and acknowledges the valuable assistance of U.S. law enforcement and regulatory authorities, the U.S. Department of Justice, the U.S. Securities and Exchange Commission, and the Washington Field Office of the Federal Bureau of Investigation, as well as the CFTC’s foreign counterparts in this matter ─ the FSA, FINMA, and the Japanese Financial Services Agency.
CFTC Division of Enforcement staff members responsible for this case are Philip P. Tumminio, Anne M. Termine, Rishi K. Gupta, Jonathan K. Huth, Timothy M. Kirby, Aimée Latimer-Zayets, Terry Mayo, Brian G. Mulherin, Elizabeth Padgett, Maura M. Viehmeyer, Jason Wright, Gretchen L. Lowe, and Vincent A. McGonagle. CFTC Staff from the Division of Market Oversight and Office of the Chief Economist also assisted with the investigation of this matter.