Investor Confidence in UBS May be Misplaced

US News

Switzerland's biggest bank, UBS AG, received some very good news last week. It attracted $12 billion in new assets from wealthy clients in the first quarter of 2012. This impressive influx of funds beat analysts' estimates and sent the stock soaring. It was up 5.5 percent on May 2, 2012.

UBS is understandably optimistic about its future. Its CEO and chairman said, "We believe our wealth management businesses as a whole will continue to attract net new money, as our clients recognize our efforts and continue to entrust us with their assets."

This surge in investor interest is surprising, given the very bad news the bank also received last week. On May 1, 2012, the SEC reported that UBS AG will pay $26.6 million to resolve claims its Puerto Rico-based brokerage unit sold shares in its closed end mutual funds without disclosing that it was propping up the price of the funds in the secondary market. UBS allegedly solicited thousands of investors to invest in these funds by representing there was a liquid and competitive secondary market for the funds. UBS also allegedly bought shares into its own inventory from customers who wanted to exit the market and then sold 75 percent of its closed-end fund inventory to unsuspecting investors.

According to SEC Enforcement Director Robert Khuzami, this conduct deprived these investors of "accurate price and liquidity information" and "UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law--accurate price and liquidity information, and a trading desk that did not advantage UBS's trades over those of its customers." The $26.6 million will be placed into a fund for investors harmed by this conduct. Although UBS consented to this settlement, it did not admit that it engaged in any wrongdoing. And this isn't the first time the bank has paid a large fine.

In October, 2011, UBS agreed to pay a fine of $12 million to settle accusations it failed to oversee millions of short sale trades over a five-year period. Allegedly, UBS permitted its employees and some of its clients to sell short without verifying that its traders could actually produce the underlying shares. UBS also denied any wrongdoing in this matter.

On April 11, 2011, UBS was ordered to pay nearly $11 million in connection with charges it misled its customers about the safety of principal-protected notes issued by Lehman Brothers in the months prior to its bankruptcy. UBS is alleged to have failed to emphasize to its customers that these notes were unsecured and payment of principal was not guaranteed. Without admitting to any wrongdoing, UBS agreed to pay a $2.5 million fine and to reimburse customers an additional $8.5 million. FINRA's enforcement chief commented that UBS brokers "did not even understand the complex products they were selling."

While UBS's regulatory woes are probably no greater than those of its competitors, its conduct should be a source of concern to investors. Yet, this is clearly not the case. You have to wonder whether the confidence investors are placing in UBS is misplaced.

Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.

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