In mid-2007, UBS structured the ACA ABS 2007-2 CDO that mainly included CDS on subprime residential mortgage-backed securities (RMBS), for which ACA Management was serving as collateral manager, as per the SEC’s order instituting settled administrative proceedings.
The market watchdog alleged that the company failed to reveal that it has retained millions of dollars in upfront cash, which sums up nearly $23.6m it received during the course of purchasing collateral for the CDO.
Instead of transmitting this cash to the CDO when the collateral was transferred, UBS kept the entire amount of upfront payments in addition to its disclosed fee of $10.8m, the US securities regulator said.
SEC enforcement division co-director George Canellos said, "UBS kept $23.6 million that under the terms of the deal should have gone to the CDO for the benefit of its investors.
"In doing so, UBS misrepresented the nature of the CDO’s collateral and rendered false the disclosures about how that collateral was acquired."
UBS has agreed to reimburse disgorgement of the $23.6m in upfront payments as well as the disclosed fee of about $10.8m as well as prejudgement interest of around $9.7m and a penalty of $5.7m to settle the charges.
