Libor Fixing Scandal: Record Fine Not The End For UBS Woes

UBS may have negotiated a $1.5bn truce in its latest skirmish with investigators over libor rigging, but it is by no means the end of the legal and reputational troubles for Switzerland's biggest bank.

UBS agreed a record $1.5bn (£920m/€1.1bn) fine with US, UK and Swiss authorities for its role in manipulating a number of key benchmark interbank lending rates - including a record £160m penalty with the UK's Financial Services Authority (FSA) and admitted to one count of wire fraud relating to rigging rates in Yen.

The record settlement does not spell the end of difficulties for UBS, however, and is simply the latest in a disturbing trend of negative headlines for the bank, including run-ins with Japanese regulators and US tax authorities and risk serious management failures that led to the conviction of one of its own "rogue" London-based traders. All this comes as the bank attempts to navigate through a tough trading environment and is paring back its global headcount as well as its investment banking operations.

Reputational risks aside, UBS still faces civil investigations and class action lawsuits in the US which could result in significant litigation costs even if it manages to avoid paying judgements - despite having negotiated immunity deals with the Department of Justice and regulators in Switzerland and Canada.

A joint probe by the New York and Connecticut attorneys general, New York head prosecutor Eric Schneiderman and his opposite number in Connecticut, George Jepsen, of UBS and 15 other banks, rumbles on and the UK's Serious Fraud Office (SFO) began investigating a number of unnamed banks and individuals and their roles in Libor manipulation in July. Last week it revealed that it had arrested three British men as a result.

A source close to the UK regulators confirmed to IBTimes UK that the FSA settlement would have no impact on the SFO's criminal probe *if* UBS was being investigated.

David Kovel, a partner in the New York office of Kirby McInerney LLP who is leading the first US-based class action challenge against several global banks including UBS and Barclays in New York's Southern District Court over Libor manipulation, suggested that "the more evidence that comes out from [criminal investigations], the more likely it is that class actions suits like ours will prevail."

Battered Reputation

UBS has weathered a flurry of major incidents with global regulators that have linked the formerly staid Swiss lender to some of the worst excesses of the recent banking culture.

In November this year, ex-UBS employee Kweku Adoboli was found guilty of two counts of fraud and sentenced to seven years in prison, after losing more than £2.3bn in unauthorised trades when he worked on the Swiss bank's Exchange Traded Funds desk.

Earlier this summer, UBS admitted that failings in its investment bank's handling of the Facebook IPO in May cost it 349m Swiss francs, pulled the unit into a loss the fiscal second quarter and dragged net income at the global bank down 58 percent.

In April 2008, UBS admitted to failings in its risk management structure following a 50-page report requested by the Swiss Federal Banking Commission after more than $50bn in Swiss franc losses across many divisions between 2007 and 2009.

Fast-forward to November 2009 and the UK's FSA fined UBS £8mn for "systems and controls failures that enabled employees to carry out unauthorised transactions involving customer money on at least 39 accounts, which took place between January 2006 and December 2007."

In 2009, UBS also paid out $780m to the US government to settle allegations that it defrauded US tax authorities.

The mis-steps led to massive withdraws from UBS's key wealth management unit - some 190bn Swiss francs in 2008 and 2009 - nearly half of which were subsequently hoovered up by its hometown rival Credit Suisse.

Even back in May 2004, the Securities and Exchange Surveillance Commission issued a recommendation that the Prime Minister and the Commissioner of Japan's Financial Services Agency to take administrative disciplinary action against UBS for "facts constituting violations of laws and regulations by UBS Securities."

Email Trail

As detailed by IBTimes UK, Barclays was the first to settle with US and UK authorities with respect to Libor rigging during a tumultuous spell for the bank that saw it losing its its Chairman Marcus Agius, CEO Bob Diamond and COO Jerry Del Missier, all of whom struggled to tackle parliament and the court of public opinion about its culture.

Emails uncovered during the investigation included the now infamous "Done...for you big boy" missive and the "Come over one day after work and I'm opening a bottle of Bollinger" offer from a colleague grateful for the bid-rigging collusion.

No less damning were communications revealed by the FSA, which said at least 45 traders and managers were involved in or were aware of the practice of attempting to influence rate submissions.

The emails include, "If you keep 6s unchanged today ... I will f***ing do one humongous deal with you ... Like a 50,000 buck deal, whatever ... I need you to keep it as low as possible ... if you do that .... I'll pay you, you know, 50,000 dollars, 100,000 dollars... whatever you want ... I'm a man of my word."

Potential Losses

UBS said the Libor settlement will likely dip the bank into a fourth quarter loss that could be as much as 2.5bn Swiss francs. In its latest financial results, published in October, the bank said it had accelerated plans to execute "our strategy, exiting or streamlining certain businesses within the Investment Bank" and that costs involved would likely lead to a net loss for the full year.

"The settlement with regulators today removes a major overhang for the bank which recently announced plans to cut 10,000 jobs and downsize its investment banking unit," said ETX Capital's head of trading Joe Rundle. "Short term pressure is to be expected for the stock, however, the Libor scandal at the bank has been well flagged. The bank has spent much of this year and last bolstering its capital."

In Wednesday's statement, UBS reiterated that it is making progress in risk-weighted assets reduction in the fourth quarter and expects its fully applied Basel III common equity tier 1 ratio to be roughly in line with the third quarter's level of 9.3 percent, and net new money in UBS's wealth management businesses is expected to be positive.

That said, UBS shares have still been one of the best-performing of the entire European banking sector so far this year, rising more than 37 percent since January and outpacing the benchmark Bloomberg Europe Banks and Financial Services Index by nearly 15 percent.

Still, CEO Sergio Ermotti, who replaced former boss Oswald Gruebel last fall, appeared to be ready to re-align the bank's priorities.

"No amount of profit is more important than safeguarding the good name of our firm," he said in a memo to bank employees. "I must remind all of you that we share a responsibility to run our business in a manner that is fully compliant with laws and regulations of those jurisdictions in which we operate. Each of us is a guardian of our reputation."