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U.S. Securities and Exchange Commission

Securities and Exchange Commission

Litigation Release No. 18112 / April 28, 2003

Securities and Exchange Commission v. UBS Warburg LLC, 03 CV 2943 (WHP) (S.D.N.Y.)


The Securities and Exchange Commission announced today that it has settled charges against UBS Warburg LLC, a Connecticut-based brokerage firm and investment bank, arising from an investigation of research analyst conflicts of interest. This settlement, and settlements with nine other brokerage firms, are part of the global settlement the firms have reached with the Commission, NASD, Inc., the New York Stock Exchange, Inc. ("NYSE"), the New York Attorney General, and other state regulators. As part of the settlement, UBS Warburg has agreed to pay $25 million as disgorgement and an additional $25 million in penalties. One-half of the total of these payments - $25 million - will be paid in connection with the SEC action and related proceedings by the NASD and NYSE and will be placed into a distribution fund for the benefit of customers of the firm. The remainder will be paid to resolve related proceedings by state regulators. In the SEC action, UBS Warburg has agreed to a federal court order that will enjoin the firm from future violations of the federal securities laws and NASD and NYSE rules and require the firm to make changes in the operations of its equity research and investment banking departments. In addition, UBS Warburg will pay, over five years, $25 million to provide the firm's clients with independent research, and $5 million to be used for investor education.

In connection with this matter, the Commission today filed a Complaint against UBS Warburg in the U.S. District Court for the Southern District of New York, alleging violations of the federal securities laws and NASD and NYSE rules.1 According to the Commission's Complaint, from at least July 1999 through June 2001, research analysts at the Firm were subject to inappropriate influence by investment banking at the Firm. The Complaint also alleges that UBS Warburg published exaggerated or unwarranted research or research that lacked a reasonable basis, received payments from other firms to publish research on certain companies without ensuring that such payments were disclosed, and made payments to other firms for those firms to publish research on UBS Warburg's underwriting clients. The Firm also failed to maintain appropriate supervision over its research and investment banking operations.

Specifically, the Commission's Complaint alleges that:

  • The Firm's compensation system provided an incentive for research analysts to participate in investment activities and to assist in generating investment banking business, and six PaineWebber analysts were explicitly guaranteed "investment banking bonuses." Firm analysts also participated in pitches for investment banking business and prepared portions of pitchbooks used in such solicitations. Some pitchbooks contained information that implied to issuers that UBS Warburg would provide positive research coverage if selected for an investment banking transaction, and that such coverage could result in rising stock prices for those companies.

  • In certain instances, UBS Warburg published exaggerated or unwarranted research. For example, one of UBS Warburg's telecom analysts issued positive recommendations on an investment banking client, Interspeed, notwithstanding his privately expressed view that the stock should be shorted. In another instance, an analyst spoke to UBS Warburg's sales force before the market opened following the announcement that Triangle Pharmaceuticals, an investment banking client, did not obtain FDA approval of a particular drug. (This news caused the stock price to fall by 23%.) The analyst made a statement, in form or in substance, that the FDA's action had been anticipated, although the analyst had maintained a buy recommendation on the stock. When a member of UBS Warburg's Equity Trading Management sent the analyst an e-mail asking why they were not informed of the analyst's opinion, the analyst explained:

    Triangle is a very important client of [the firm]. We could not go out with a big research call trashing their lead product, although we had a feeling the FDA might balk. Had we been right or wrong, it would have been a disaster. I just wanted the salesforce to know we were not surprised, and that where appropriate we had had some conversations with the buyside. Sorry this was not conveyed.

  • UBS Warburg failed to disclose that it had received payments from other investment banks to provide research coverage of those firms' investment banking clients in offerings for Flextronics International, Ltd. and Atmel, Inc. UBS Warburg also made payments to several investment banks for research coverage of UBS Warburg's investment banking clients in offerings for Netopia, Inc. and Espeed, Inc. without ensuring that such payments were disclosed.

  • The Firm failed to establish and maintain adequate procedures over research analysts to prevent or manage conflicts of interest.

UBS Warburg has agreed to settle the Commission's action and has consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment that, if approved by the court, permanently enjoins UBS Warburg from violations of Section 17(b) of the Securities Act of 1933 and NASD and NYSE rules pertaining to just and equitable principles of trade (NASD Rule 2110; NYSE Rules 401 and 476), advertising (NASD Rule 2210; NYSE Rule 472), and supervisory procedures (NASD Rule 3010; NYSE Rule 342). The final judgment also orders the firm to make the payments described above, and provides for the appointment of a fund administrator who, subject to court approval, will formulate and administer a plan of distribution for those monies placed into the distribution fund.

In addition, the final judgment orders UBS Warburg to implement structural reforms and provide enhanced disclosure to investors, including a broad range of changes relating to the operations of its equity research and investment banking operations. UBS Warburg has agreed to sever the links between research and investment banking, such that: research and investment banking are physically separated with completely separate reporting lines; analysts' compensation cannot be based directly or indirectly upon investment banking revenues; investment bankers may no longer evaluate analysts; investment bankers will have no role in determining what companies are covered by the analysts; and research analysts will be prohibited from participating in efforts to solicit investment banking business, including pitches and roadshows. In addition, UBS Warburg must disclose on the first page of each research report whether the firm does or seeks to do investment banking business with that issuer, and when UBS Warburg decides to terminate coverage of an issuer, UBS Warburg must issue a final research report discussing the reasons for the termination. Each quarter, UBS Warburg also will publish on its website a chart showing its analysts' performance, including each analyst's name, ratings, price targets, and earnings per share forecasts for each covered company, as well as an explanation of the firm's rating system.

UBS Warburg also has agreed as part of this settlement to retain, at its own expense, an Independent Monitor to conduct a review to provide reasonable assurance that the firm is complying with the structural reforms. This review will be conducted eighteen months after the date of the entry of the Final Judgment and the Independent Monitor will submit a written report of his or her findings to the SEC, NASD, and NYSE within six months after the review begins. Five years after the entry of the final judgment, UBS Warburg must certify to the SEC and other regulators that it has complied in all material respects with the requirements and prohibitions of the structural reforms.

* * *

The Commission acknowledges the assistance of NASD, NYSE, the Illinois Securities Department, the Securities Division of the Arizona Corporation Commission, and other state regulators in the investigation of this matter.

SEC Complaint in this matter
SEC Judgment in this matter
Final Judgment Appendix A
Final Judgment Appendix B

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The Complaint also alleges conduct that occurred at PaineWebber, which was acquired by UBS Warburg's parent, UBS AG, and renamed UBS PaineWebber. As part of the merger, PaineWebber's research and investment banking activities were shifted to UBS Warburg. In this release, UBS Warburg, UBS PaineWebber, and PaineWebber are referred to collectively as "the Firm."




Modified: 04/28/2003