3 Min Read
* SEC says UBS unit misled investors to hide liquidity crisis
* UBS settles charges without admitting or denying
* Two executives plan to contest the SEC's charges
By Sarah N. Lynch and Jonathan Stempel
May 1 (Reuters) - U.S. securities regulators charged a Puerto Rico-based unit of UBS AG and two executives on Tuesday with misleading investors by masking its control of the secondary market for 23 proprietary, closed-end mutual funds.
UBS Financial Services Inc of Puerto Rico will pay $26.6 million to settle the charges by the U.S. Securities and Exchange Commission without admitting or denying the allegations.
Miguel Ferrer, the unit's vice chairman and former chief executive, and its head of capital markets Carlos Ortiz, are contesting the SEC's administrative proceedings.
"UBS Puerto Rico denied its closed-end fund customers what they were entitled to under the law - accurate price and liquidity information, and a trading desk that did not advantage UBS' trades over those of its customers," SEC enforcement chief Robert Khuzami said in a statement.
The SEC's charges against the company allege that UBS Puerto Rico knew about a significant "supply and demand imbalance" and had internal discussions about a weak secondary market.
But the firm never told investors that it actually controlled the secondary market where investors were selling their shares in the fund, the SEC said. UBS allegedly increased its holdings in closed-end funds to bolster market prices and make the market appear more stable.
The SEC also claimed that Ferrer made misrepresentations and did not disclose material facts about the closed-ends funds, while Ortiz falsely represented that the closed-end fund shares were priced off of supply and demand. The SEC said Ortiz hid the inventory increases from investors and rarely changed prices.
In a statement, Ortiz denied the SEC's charges, calling them "wholly without merit."
"At all times, I, and the team that I supervise, have been responsible participants in the secondary market for the funds in an effort to maintain an orderly market. Any claim by the SEC that fund investors were misled or mistreated is unfounded," he said.
An attorney for Ferrer was not immediately available for comment.
Of the $26.6 million that UBS will pay, $14 million will go toward the fine. Another $11.5 million will be paid in disgorgement and $1.1 million in interest. The money will be placed into a fund for harmed investors.
"UBS Puerto Rico is pleased to have resolved this matter, which relates to a period of significant turmoil in the global financial markets between 2008 and 2009," a UBS spokesman said.
"We disclosed the SEC's investigation more than a year ago, and since that time have further improved the transparency of our trading procedures as part of our ongoing commitment to the local capital market."