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Attorney General Andrew M. Cuomo today announced a settlement with David Shulman, formerly a top executive at UBS, over Shulman’s sale of personal holdings of auction rate securities based on insider information about UBS’s collapsing auction rate securities market. Shulman must pay $2.75 million to New York State and must serve a suspension from employment by, or association with, a broker or dealer. Shulman was formerly the Global Head of the Municipal Securities Group of UBS AG and the Head of Fixed Income for the Americas of UBS Securities LLC.
“While thousands of UBS customers received no warning about the auction rate securities market’s serious distress, David Shulman – one of the company’s top executives – used insider information to take the money and run,” said Attorney General Cuomo. “From the start, our prime goal has been to get investors their money back. But let there be no mistake -- When corporate executives unlawfully take advantage of their positions, we will hold them accountable.”
An investigation by the Attorney General into the auction rate securities market found that UBS Securities LLC and UBS Financial Services, Inc. (“UBS”) marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk. The Attorney General’s investigation resulted in settlements with thirteen broker-dealers, providing over $60 billion in investor buybacks. These settlements have affected thousands of consumers nationwide and represent the largest return on behalf of investors ever.
The Attorney General’s investigation into UBS included an examination of Shulman’s personal trading of auction rate securities. From August 2006 to August 2008, Shulman was UBS’s highest-ranking executive with day-to-day responsibility for UBS’s auction rate securities program. Between December 11 and December 13 of 2007, Shulman learned that UBS’s auction rate securities program was in distress and that there was concern that upcoming auctions in student loan auction rate securities could fail. At that time, Shulman owned $1.45 million in student loan auction rate securities, which were scheduled to be sold in late December and early January. On December 13, 2007, Shulman instructed his broker to immediately sell his holdings in student loan auction rate securities, before the upcoming auctions could occur. Later that day, Shulman’s student loan auction rate securities were sold, inter-auction, directly to the UBS Short Term Trading desk, which was under his supervision. Shulman’s broker mentioned Shulman by name when he called the desk to place the trades. This was the first and only time Shulman sold auction rate securities inter-auction.
The settlement resolves charges that Shulman violated New York’s Martin Act. Under the settlement, Shulman will pay $2.75 million to New York State as a civil penalty. In addition, Shulman is subject to a suspension from employment by, or association with, a broker or dealer for a period of thirty months, beginning from his July 2008 suspension by UBS and ending in January 2011.
Today’s action marks the second settlement with a UBS senior executive over insider trading in the Attorney General’s auction rate securities investigation. The Attorney General’s auction rate securities investigation is continuing.
Attorney General Cuomo thanked the Securities and Exchange Commission for its cooperation and assistance in this investigation.
The investigation was conducted by Assistant Attorneys General Pamela Mahon, Christopher Mulvihill, and Ethan Zlotchew, and Volunteer Assistant Attorney General Motoko Muramatsu, under the supervision of Special Deputy Attorney General for Investor Protection David A. Markowitz.
A copy of the settlement can be viewed at:www.ag.ny.gov/media_center/2010/feb/Shulman_AOD.pdf
FURTHER INFORMATION
The settlement details how Shulman learned of significant dislocation in UBS’s auction rate securities market – and specifically in its student loan auction rate securities market – in the days immediately prior to the December 13, 2007 sale of his own student loan auction rate securities:
- During a three-day period ending on December 13, 2007, UBS’s inventory levels of municipal and student loan auction rate securities increased dramatically. In particular, the student loan auction rate securities inventory increased from less than $2 billion to over $3 billion, or more than double the yearly average.
- On December 11, 2007, one of Shulman’s employees e-mailed him that the group was “very concerned” about certain issues related to UBS’s student loan auction rate program and its continuing support for that program. In that e-mail, the employee stated that “[t]he auction product is flawed …” (emphasis added).
- Early on the morning of December 12, 2007, one of Shulman’s employees forwarded an e-mail to Shulman with a subject line of “stud loans,” and warned Shulman that “The auction product does not work … our options are to resign as remarketing agent or fail or ?” (emphasis added). In another e-mail that same day, the employee advised Shulman in no uncertain terms that with respect to UBS’s student loan auction rate securities, “The Entire book needs to be restructured out of Auctions…” (emphasis added).
- Also on December 12, 2007, Shulman e-mailed the Investment Bank’s Head of Public Finance, to say “we are in a difficult spot right now…” (emphasis added). Shulman was responding to the Head of Public Finance’s call for a “mandatory meeting” the next morning due to “the continued deterioration of the auction rate market” (emphasis added).
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