Former UBS General Counsel Settles Insider Trading Rap

The former chief lawyer for UBS' investment bank has agreed to pay $6.5 million to settle an allegation that he dumped his investments in auction-rate securities after getting a company e-mail warning that the market was in trouble, New York officials said Tuesday. David Aufhauser, who resigned as the bank's GC, will give up a $6 million bonus that he had been scheduled to receive from UBS and will pay a $500,000 civil penalty but will not face criminal charges and is not required to admit any wrongdoing.

David B. Caruso

2008-10-08 12:00:00 AM

New York Attorney General Andrew Cuomo said the payment would resolve an insider trading investigation of David Aufhauser, who recently resigned as general counsel at the bank.

As part of the deal, Aufhauser will give up a $6 million bonus that he had been scheduled to receive from UBS. The state will get the money instead. He will also pay a $500,000 civil penalty.

Aufhauser will not face criminal charges and he is not required to admit any wrongdoing.

A spokesman for Aufhauser, Tom Johnson, said in a statement that his client was pleased to have settled the matter and that the transaction "resulted in absolutely no personal profit and did not involve any public investors."

He added that a UBS inquiry had concluded earlier this year that Aufhauser's transactions were lawful.

The $330 billion auction-rate market involved the buying and selling of securities backed by low-risk forms of debt like municipal bonds and student loans. The instruments were generally considered to be as liquid as cash and as safe as a money market, but the auction process failed last winter because of the turmoil in the credit markets.

State investigators accused Aufhauser of selling off about $250,000 of his personal holdings in auction-rate securities in December 2007, at a time when executives at UBS were beginning to talk about the possibility of a collapse.

According to the attorney general's office, Aufhauser opened an e-mail from the company's chief risk officer regarding the market's problems on Dec. 14 as he rode the Amtrak Acela train from New York to Washington.

By the time the train reached the station, Aufhauser had forwarded the e-mail to other attorneys and sent a message to his personal investment adviser about his own auction-rate certificates. "I want to get out of arcs. Let's talk Monday," the e-mail said.

His assets in the troubled market were liquidated within seven days.

Cuomo sued UBS in July, accusing the company of fraudulently promoting the securities as safe, even as it warned internally that trouble was on the horizon.

His investigators said they had identified seven UBS executives who sold $21 million of their personal stakes in the market in the three months leading up to its failure.

"We are looking at a number of executives," Cuomo said Tuesday. He declined to name them or elaborate, but suggested that he was intent on seeking payments from financial services executives who got big payouts even as the industry crumbled.

"If you have situations where senior executives acted improperly, they have to be held accountable, and to the extent there were bonuses or golden parachutes received, they should be recouped," he said.

The market for auction-rate securities collapsed in February, leaving tens of thousands of investors holding billions of dollars worth of securities that they were unable to sell.

As part of Tuesday's settlement, Aufhauser, who was general counsel for the U.S. Treasury Department before joining UBS, will also be banned from working in the securities industry or practicing law in New York for two years.

UBS AG agreed in August to buy back $18.6 billion in auction-rate securities from investors to settle Cuomo's investigation. Other banks entered into similar settlements, including Merrill Lynch & Co., Goldman Sachs Group Inc., Deutsche Bank, Citigroup Inc., Morgan Stanley, JPMorgan Chase & Co. and Wachovia Corp.