By DAVID BERTOLA
dbertola@bizjournals.com | 716-541-1621

New York Attorney General Eric Schneiderman announced a multimillion-dollar settlement May 4 with stock-and-bond broker UBS for fraudulent and anti-competitive conduct in its municipal bond derivative transactions with governments and nonprofits across the country.

UBS will pay $90.8 million as part of a coordinated federal and state enforcement agency settlement. Of that amount, $63.3 million will go to a multistate restitution fund for governments and nonprofits that entered into municipal derivatives contracts with UBS, or used UBS as a broker on such deals, between 2001 and 2004. The agreement also provides that UBS will pay the states $2.5 million in penalties and $5 million in fees and costs of the investigation. The firm will pay another $20 million directly to other governments and nonprofits as part of its resolution with the SEC.

UBS' New York City-based reinvestment and derivatives operation handled business nationally. Entities entitled to restitution include the Town of Niagara, Monroe Community College Association Inc. and the New York City Municipal Water Finance Authority. Other states joining New York in the settlement include: Alabama, California, Colorado, Connecticut, District of Columbia, Florida, Idaho, Illinois, Kansas, Maryland, Massachusetts, Michigan, Missouri, Montana, Nevada, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Texas, Tennessee and Wisconsin.

The multistate settlement is the single-largest component of coordinated settlements between UBS and the U.S. Department of Justice's Antitrust Division, the Securities and Exchange Commission and the Internal Revenue Service, as well as the states. UBS is the second of several financial institutions involved in the ongoing municipal bond derivatives investigation to resolve the claims against it. Bank of America entered into a settlement in December.

The settlement follows an investigation led by the attorneys general of New York and Connecticut, parallel with the U.S. Department of Justice and other enforcement agencies. Starting in 2008, the state authorities undertook a review of the municipal bond derivatives market, where tax-exempt entities such as governments and nonprofit organizations issue municipal bonds and reinvest the proceeds until the funds are needed or enter into contracts to hedge interest-rate risk.

The investigation revealed conspiratorial and fraudulent conduct involving individuals at UBS, other financial institutions and certain brokers with whom they had working relationships. Rather than establishing honest and fair terms of contract for the municipal derivative sales, certain UBS employees and their affiliates at other institutions rigged bids, submitted noncompetitive courtesy bids and fraudulent certificates of arms-length bidding to government agencies. The misconduct led local and state governments, municipalities, counties, government agencies and school districts, as well as nonprofits, to enter into municipal derivatives contracts on less-advantageous terms than they would have otherwise.