UBS Investigated For Improperly Valuing Mortgage Bonds And Related Securities
On February 2, 2008, Kara Scannell, Anita Raghavan and Amir Efrati of The Wall Street Journal reported that federal criminal prosecutors are investigating whether broker-dealer UBS “misled investors by booking inflated prices of mortgage bonds it held despite knowledge that the valuation had dropped....” According to the report, the Securities and Exchange Commission (SEC) had also initiated a formal investigation into whether UBS improperly mispriced mortgage securities.
While the potential criminal and administrative consequences of these investigations are very serious, the civil consequences of such misconduct could be both massive and far reaching. Wide-spread mispricing of subprime mortgages and related securities would almost inevitably have caused significant damage to much of UBS’s customer base as well as to purchasers of its mortgage securities and its shareholders. Such misconduct would be particularly troubling because of the potential benefits that inured to UBS in the form of inflated sales proceeds, excessive management fees, and avoidance of losses. Such misconduct would also likely cause irreparable damage to UBS’s reputation because it may be indicative of efforts by UBS to unload risky mortgage securities off on its customers at inflated prices just as the credit crisis was heating up.
