UBS Cited By Massachusetts for Hedge-Fund Relations (Update3)

Date: Wednesday, June 27, 2007
Author: Jenny Strasburg, Bloomberg

June 27 (Bloomberg) -- UBS Securities LLC, the investment- banking division of Zurich-based UBS AG, was accused by Massachusetts regulators of ``dishonest and unethical'' practices in dealings with hedge-fund advisers.

The subsidiary, based in Stamford, Connecticut, gave hedge- fund managers below-market rent, low-interest personal loans and other benefits to retain and increase business, according to a complaint today from the office of William Galvin, the secretary of the commonwealth and its top securities regulator.

UBS competes with securities firms including Goldman Sachs Group Inc. and Morgan Stanley for a share of about $8 billion in prime brokerage fees generated each year through relationships with hedge funds, according to Celent LLC, a Boston-based research and consulting firm. Federal regulation generally governs relationships between hedge funds and brokers.

``Brokers want their business, and they're willing to spend money to make money,'' said Jeffrey Blumberg, a partner in the Chicago-based investment-management practice of law firm Drinker Biddle & Reath LLP, which isn't involved in the case. ``What's surprising is that, assuming UBS complied with federal guidelines, Massachusetts thinks their rules somehow trump compliance at that level.''

The complaint also charges UBS with failure to supervise its employees' giving of gifts and gratuities. The action, filed with the state's Securities Division, seeks a cease-and-desist order, a censure and an undisclosed administrative fine, the statement said.

Quid Pro Quos

Doug Morris, a UBS spokesman in New York, declined to comment.

``Unbeknownst to the pension funds, university endowments, charitable foundations, institutional investors and individuals who invest in hedge funds, the gifts and gratuities for the hedge-fund advisers come with implicit and sometimes explicit quid pro quos,'' Galvin said in an administrative complaint.

Prime-brokerage services include securities-lending and lending money for trading.

The investment-banking firm is accused of violating the Massachusetts Uniform Securities Act, according to the complaint.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net .