UBS Warburg

The Swiss company UBS Warburg merged with PaineWebber in 2000 in an effort to enter into the US investment market. Warburg acquired PaineWebber for $10.8 billion dollars, purchasing shares at approximately forty-seven percent more than their market value at the time. The company was one of ten firms targeted for securities fraud in recent investigations by the New York Attorney General, SEC, NASD, and other federal regulators.

UBS Warburg and Enron

In early 2002 the House Committee on Government Reform began to investigate a filing by a UBS Warburg stockbroker who claimed that he was laid off because he advised his clients against keeping Enron shares. The broker, Chung Wu, was dismissed on August 21, 2001, within hours of sending the following email to his clients: "Financial situation is deteriorating in Enron and price drops another $7.00...I would advise you to take some money off the table even at this point." At the time the email was sent, Enron shares were already trading at less than half of their 2000 value. UBS Warburg's branch manager, Patrick Mendenhall, addressed Wu's clients afterward, stating, "Mr. Wu's statements are contrary to UBS PaineWebber's current recommendation concerning Enron stock." UBS Warburg responded to Wu's August 31, 2001 complaint (filed with the NASD) by arguing that Wu had been removed because he overstepped the company's policy against contacting more than ten clients without gaining supervisor approval first. Wu claimed that UBS Warburg removed him in response to pressure from Enron.

Another UBS Warburg broker disclosed to the congressional committee that UBS Warburg advisors were instructed not to guide clients toward diversifying their stocks if they held Enron shares. The employee held that it was likely that the investment advice of UBS Warburg analysts had been compromised by the influence of Enron.

UBS Warburg purchased Enron's energy trading unit in January of 2002, after the company filed for bankruptcy. The operations were renamed UBS Warburg Energy. In addition to obtaining the business, UBS Warburg acquired two Enron skyscrapers and took aboard 650 former Enron employees, including executives John Lavorato and Louise Kitchen, who had taken the company's largest bonuses after the bankruptcy ($5 million and $2 million), and Greg Whalley, Enron's former president.

Further Allegations

UBS Warburg faced two additional allegations between the time it fired Wu and settled with federal regulating agencies. In August of 2002, a class action lawsuit was filed against UBS Warburg for its failure to drop its "strong buy" rating of Enron until four days before it filed for bankruptcy. The complaint alleged that UBS Warburg violated Sections 10(b)(5), 11, and 12 the Securities Exchange Act. At the same time, UBS Warburg received a "severe disciplinary warning" on account of six violations of the Financial Supervisory Services (FSS) of South Korea's policy. Fifteen of UBS Warburg's employees were penalized. The warning focused on the company's leak of insider information on eleven companies (domestically trading in South Korea) to its clients and staff. One of the companies UBS Warburg illegally shared information on was Samsung Electronics. Merrill Lynch was given a lesser "disciplinary warning."

UBS Warburg Settlement

On December 20, 2002 the SEC released information on the $1.4 billion settlement that had been reached between numerous regulating agencies (Securities Exchange Comission [SEC], New York Attorney General, National Association of Securities Dealers [NASD], North American Securities Administrators Association [NASAA], and New York Stock Exchange [NYSE]), and ten prominent investment banking firms that had been under investigation. The settlement was finalized on April 28, 2003.The terms of the settlement focused on each firm's need to:

  • Keep the research and ratings of analysts separate from the influence of investment banking
  • Cease the practice of "spinning" IPOs
  • Contract research from at least three independent firms
  • Make its ratings and recommendations publicly available
  • Pay a monetary settlement

As part of the settlement, UBS Warburg agreed to pay $25 million as a penalty, $25 in "disgorgement," $25 million to fund independent research, and $5 million for future investor education.

UBS Warburg continues to face allegations regarding its analyst advice and actions in connection with Enron.

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