Charges Pending in UBS Payoff Case


Sources say at least one analyst at the investment firm may face charges of selling information on ratings changes before they're made public

Here's proof some still see value in brokerage-produced stock research, even after the research scandal of four years ago tarnished the image of Wall Street analysts. BusinessWeek has learned federal authorities are on the verge of busting a scheme in which at least one employee of UBS (UBS) was allegedly selling information about upcoming changes in analyst ratings on stocks to traders not affiliated with the Swiss investment firm.

Sources says federal prosecutors in New York and securities regulators in Washington will soon file charges against a number of individuals caught up in the investigation, which has been going on since last fall. Criminal and civil charges could be filed as soon as Tuesday. Investigators have found that traders working for at least two unidentified hedge funds were paying a UBS employee in New York for the information about impending ratings changes on stocks. But other traders were also buyers.

Sources say the traders often got one-day advance notice of an impending change on a stock rating by a UBS analyst. The information allowed the traders to buy or sell shares ahead of the change's public disclosure, so they could take advantage of any price swings in the stock. People familiar with the inquiry say authorities contend it was improper for the traders to act on the information, since news of the impending ratings changes was still confidential and not yet made public.

Unfair Advantage?

A UBS spokesman declined to comment on the investigation. A spokeswoman for Michael Garcia, the U. S. Attorney for the Southern District of New York, also declined to comment, as did a spokesman for the Securities & Exchange Commission (SEC). But sources say the investigation is considered a high-profile matter for federal authorities and may lead to similar allegations of wrongdoing at other Wall Street investment firms.

The investigation is just the latest example of ongoing concerns on the part of prosecutors and securities regulators about hedge funds using inside information to get an unfair trading advantage. Earlier this month, the SEC asked a dozen Wall Street brokerages, including UBS, to turn over trading data, as part of separate inquiry into allegations that brokers are improperly tipping off hedge funds about block trades by institutional investors. A hedge fund with advance word of a block trade can make big bucks, because these institutional trades have the potential to move stock prices dramatically in either direction.

Jill Fisch, a securities professor at Fordham University School of Law, says hedge-fund managers tend to be quite aggressive in trying to get an information edge in order to score a trading profit. She says many things hedge funds do to get an info advantage, such as interviewing employees of a company, are perfectly legal. But there are instances where hedge funds "may be crossing the line," she says, and that's drawing heightened scrutiny from regulators and prosecutors. "They have become aggressive about everything, and there's a lot push-back," she notes.

Keeping Secrets

The identity of the UBS employee allegedly peddling the information isn't known, nor is it clear whether the person still works at the investment firm. People familiar with the investigation say the person worked closely with an analyst at UBS. Indeed, much is still unknown about the investigation, but sources say authorities haven't uncovered any systemic abuses within UBS.

Still, the inquiry represents another black eye for Wall Street analysts. Nearly four years ago, 10 Wall Street securities firms, including UBS, Citigroup (C), Morgan Stanley (MS), and Goldman Sachs (GS), paid a total of $1.4 billion in fines and restitution to settle allegations that some analysts had conspired with investment bankers to issue favorable ratings on stocks. The analyst investigation revealed that stock research at big Wall Street brokerages often was written with one eye towards winning investment-banking business, as opposed to providing investors with honest advice.

But ratings changes on stocks have always been the kind of market-moving information that traders are keyed to snap up. Look for this latest investigation to force all of Wall Street to take another look at its internal systems to make sure ratings changes remain secret until the results are made public.

Goldstein is a senior writer at BusinessWeek.

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