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More ‘Hedge Fund Hotel’ Flak For UBS

Date: Thursday, June 28, 2007
Author: Wall Street Journal

Massachusetts regulators step up accusations that the Swiss bank went too far by offering posh digs and lush perks to hedgies in exchange for future business.

Massachusetts regulators accused Swiss banking giant UBS AG of improperly providing below-market office space, low-interest personal loans and other perks to Boston-based hedge-fund executives if they steered enough business to UBS.

The administrative complaint, part of a previously disclosed investigation, was filed by the Massachusetts Securities Division against UBS's U.S. brokerage arm. The complaint offers a look at some of the deals that brokers are providing hedge funds, the lightly regulated investment vehicles for the wealthy. Hedge funds are sought-after clients because they often trade rapidly and pay high commissions.

Massachusetts officials maintain the below-market rent and other perks are gifts, which must not exceed $100 in value under rules established by the National Association of Securities Dealers. The state alleges that UBS also violated a broad Massachusetts law prohibiting "dishonest and unethical" business practices.

According to the complaint, UBS provided the perks only if the hedge funds did a certain amount of business with the firm -- and would withdraw the inducements if they didn't -- an arrangement that regulators said amounted to an improper "quid pro quo."

The state is seeking to stop the alleged practices and an unspecified fine. A UBS spokeswoman declined to comment.

In January, Secretary of the Commonwealth William Galvin, who oversees the Massachusetts Securities Division, launched the investigation as part of a broader examination of what have come to be known as "hedge fund hotels." In such set-ups, big investment houses offer office space and other services to hedge funds.

(Continue reading this story on Wall Street Journal)