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.)
SEC SUES UBS WARBURG FOR RESEARCH ANALYST CONFLICTS OF INTEREST FIRM TO SETTLE WITH SEC, NASD, NYSE, NY ATTORNEY GENERAL, AND STATE REGULATORS
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:
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.
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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.