Bloomberg News

UBS Fined $1.5 Billion by Regulators for Rigging Libor

December 19, 2012

UBS Fined $1.5 Billion by Regulators for Manipulating Libor

A UBS AG logo sits on the wall of the company's Finsbury Avenue offices in London. Photographer: Jason Alden/Bloomberg

UBS AG (UBSN), Switzerland’s biggest bank, must pay about 1.4 billion Swiss francs ($1.5 billion) to U.S., U.K. and Swiss regulators for trying to rig global interest rates, triple the penalties levied against Barclays Plc. (BARC)

Fines from the U.S. Commodity Futures Trading Commission and the U.S. Department of Justice total $1.2 billion, UBS said in a statement today. It will pay 160 million pounds ($260 million) to the U.K. Financial Services Authority, the largest-ever fine imposed by the regulator, and disgorge 59 million francs in estimated profits to the Swiss Financial Market Supervisory Authority.

“Clearly, this chapter isn’t positive,” UBS Chief Executive Officer Sergio Ermotti told reporters on a conference call. “We want to move forward and I think we’re showing our determination in the bank to move forward and to change the bank for good.”

About 30 to 40 people have left UBS as a result of the probes, Ermotti said, adding that the behavior of certain employees was “unacceptable.” He said he doesn’t expect any more departures.

UBS rose 0.4 percent to 15.31 francs by 9:25 a.m. in Swiss trading. The stock has advanced 37 percent in 2012, outpacing a 23 percent increase in the Bloomberg Europe Banks and Financial Services Index, which tracks 38 companies.

2,000 Requests

Global authorities are investigating claims that more than a dozen banks altered submissions used to set benchmarks such as the London interbank offered rate to profit from bets on interest-rate derivatives or make the lenders’ finances appear healthier. Barclays, the U.K.’s second-biggest bank, agreed to pay 290 million pounds in June to resolve the U.S. and U.K. Libor probes.

The U.K. finance regulator found more than 2,000 documented requests by UBS traders to manipulate rates in chat messages and group emails, and that at least 45 people at the bank knew of the practice between over a six-year period until the end of 2010. Bank employees colluded with interdealer brokers and paid them bribes to help manipulate yen Libor submissions by other banks, the FSA said in a statement.

“This is quite outrageous,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets with a reduce rating on UBS. “I was surprised that UBS was apparently one of the biggest instigators of this scandal.”

Influencing Submissions

UBS traders made “numerous requests” asking bank employees to submit interest rates with higher or lower values to benefit their proprietary trading positions, the Swiss regulator said in a statement, adding that evidence shows that “many” of the requests for Libor rates in Zurich and London were accepted.

Most of the requests were made by one trader who worked in Tokyo from 2006 to 2009, and who also contacted employees at other banks and brokers trying to influence their Libor submissions. Finma didn’t find any indication of the top management of UBS at the time being aware of the traders’ misconduct, it said.

“UBS’s misconduct was all the more serious because of the orchestrated attempts to manipulate the yen Libor submissions of other banks as well as its own and the collusion with interdealer brokers and other panel banks,” FSA director of financial crime Tracey McDermott said.

The bank didn’t qualify for the regulator’s standard 30 percent discount for cooperation because the settlement was reached later, the FSA said. UBS got a 20 percent discount.

Guilty Plea

UBS’s unit in Japan agreed to plead guilty to one count of wire fraud in relation to the manipulation of benchmark rates including yen Libor, the company said. UBS entered into a non-prosecution agreement with the U.S. Justice Department in relation to UBS AG and all its subsidiaries and affiliates except for UBS Securities Japan Co. Ltd.

One year ago, Japanese regulators penalized UBS’s Japanese operations, curtailing the bank’s ability to participate in the Tokyo interbank derivative market for a week, and ordering the bank to improve its regime of compliance and internal controls.

The fines, in total, amount to less than three weeks revenue at UBS, based on figures from 2011.

Ermotti said he doesn’t expect further penalties from the Japanese regulator and that the bank is “confident” it will be able to continue to operate in Japan and globally as normal.

Ermotti, 52, took over as CEO last September after his predecessor, Oswald Gruebel, 69, stepped down in the wake of a loss from unauthorized trading by an employee. Ermotti joined UBS in April 2011, after the period covered during the rate-rigging investigations.

Fourth-Quarter Loss

UBS continues to cooperate with other investigations into the setting of benchmark rates, Ermotti said in a memo to employees, adding that the effect of the actions of multiple institutions on the actual rate fixings, which one would need to know before trying to determine whether or how clients were affected, is still not clear.

“No amount of profit is more important than safeguarding the good name of our firm,” Ermotti said in the memo. “I must remind all of you that we share a responsibility to run our business in a manner that is fully compliant with laws and regulations of those jurisdictions in which we operate. Each of us is a guardian of our reputation.”

Past Misdemeanors

The penalty is another blemish on UBS, which is scaling back its investment bank to concentrate on wealth management. UBS said in October it may post a loss for 2012 after taking an impairment charge of 3.1 billion francs related to goodwill and other non-financial assets at the securities unit, in addition to costs tied to firing 10,000 people by 2015.

“Developments arising from past misdemeanors can only enhance the sense of relief that UBS is turning its back on such risky areas and focusing on what it does best,” Tim Dawson, a Geneva-based analyst at Helvea SA with an accumulate rating on UBS, said in a note before today’s release.

The bank said today it expects to report a fourth-quarter loss of between 2 billion francs and 2.5 billion francs, primarily as a result of litigation provisions and regulatory matters.

Excluding charges related to reorganization, fines and accounting losses on its own debt and credits to personnel expenses because of changes to pension plans, UBS expects to report a full-year pretax profit of between 2.5 billion francs and 3 billion francs, it said.

This means a pretax return on equity of about 6 percent, Kepler’s Becker said. “This is not very impressive for one of the most highly-valued banks in Europe,” he said.

Unauthorized Trading

UBS estimated it will report a common equity ratio under fully-applied Basel III rules for the fourth quarter “roughly in line” with the third quarter’s level of 9.3 percent and positive net new money at wealth management units.

UBS was fined 29.7 million pounds last month by the FSA and told by the Swiss regulator it may have to increase capital levels for operational risks after a $2.3 billion loss from unauthorized trading by Kweku Adoboli. The former trader in UBS’s London office was sentenced to seven years in jail on Nov. 20 for fraud in relation to the loss, the largest from unauthorized trading in British history.

Libor, a benchmark for more than $300 trillion of financial products worldwide, is derived from a survey of banks conducted each day on behalf of the British Bankers’ Association in London. Lenders are asked how much it would cost them to borrow from one another for 15 different periods, from overnight to one year, in currencies including dollars, euros, yen and francs.

U.K. Arrests

U.K. prosecutors made their first arrests in the criminal Libor investigation on Dec. 11. Thomas Hayes, a former trader at UBS and Citigroup Inc., and two men who worked at the brokerage RP Martin Holdings Ltd. were questioned, people familiar with the case said last week. The U.K. Serious Fraud Office, which is conducting a criminal probe in parallel with the U.S. Department of Justice’s fraud division, has focused on e-mails between traders at UBS and other banks.

UBS received conditional immunity or leniency for cooperating with the U.S. Justice Department’s and Swiss Competition Commission’s antitrust investigations into submissions of yen Libor and Euroyen Tokyo interbank offered rate, or Tibor. The Canadian Competition Bureau also granted the bank conditional immunity in its investigation into yen Libor, while the Swiss commission granted immunity on Swiss franc Libor and certain transactions related to it.

To contact the reporters on this story: Lindsay Fortado in London at lfortado@bloomberg.net Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net Frank Connelly at fconnelly@bloomberg.net


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