(Adds additional details about settlement, comment from Aufhauser spokesman and UBS beginning in second paragraph.)
By Chad Bray
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- New York Attorney General Andrew Cuomo said Tuesday that former UBS AG (UBS) executive David Aufhauser will pay $6.5 million to settle allegations he engaged in insider trading of auction-rate securities.
On a conference call, Cuomo said Aufhauser, former general counsel for UBS's investment bank and a former Treasury Department official, will pay to the State of New York his expected 2008 incentive compensation package, or bonus, of $6 million and $500,000 in civil penalties.
Cuomo said Aufhauser, who neither admitted or denied wrongdoing, was due to receive the bonus from UBS, but hadn't received it yet.
"While thousands of UBS customers were kept in the dark as the auction-rate market began to collapse, David Aufhauser, one of the company's top executives, acquired insider information and quietly dumped his personal holdings of auction-rate securities," Cuomo said in a statement.
As part of the settlement, Aufhauser agreed that he will not be employed or associated with a broker dealer, an investment advisor, hedge fund or other participant in the securities industry for two years, Cuomo said. Aufhauser also agreed not to serve as a director or officer of any public company or practice law in New York state for a two-year period, Cuomo said.
"We are pleased to have reached this amicable agreement and avoided a potentially lengthy litigation," said Tom Johnson, a spokesman for Aufhauser. "Over the past three decades, David Aufhauser has achieved a stellar reputation for honesty and integrity and has distinguished himself in both the public and private sector. Today's settlement will allow him to close the door on what was an unfortunate incident and move on with his life."
Aufhauser was one of seven executives that Cuomo alleged sold at least $21 million of their personal holdings of auction-rate securities as the market started to collapse but continued to sell the securities to customers at the time, Cuomo's office confirmed Tuesday. The executives weren't named in the complaint, which was filed against two UBS units in July.
More than a dozen banks and securities companies, including UBS, have reached agreements with regulators, including Cuomo, in recent months to repurchase more than $50 billion in auction-rate securities at par amid probes into how the complex securities were sold and marketed.
Auction-rate securities are debt instruments whose interest rates are meant to be reset periodically at daily, weekly or monthly auctions. Several auctions failed in February, driving up interest rates for auction-rate securities issuers, while leaving investors locked into long-term investments that had been promoted as safe and liquid.
On the conference call, Cuomo said his probe into the auction-rate securities market is ongoing and his office is looking at a number of executives who sold their auction-rate holdings or engaged in other potentially improper transactions. He declined to provide more specifics.
"ARS are a chapter in the story of what happened on Wall Street," Cuomo said, referring to the recent financial turmoil in the U.S.
The attorney general said his office would seek to recoup bonuses or other financial compensation if his office uncovers improper activity by executives, such as insider trading.
Cuomo alleged that Aufhauser, while riding an Amtrak Acela train from New York to Washington, received an email on Dec. 14, from the company's chief risk officer about UBS's position and intentions in the auction-rate securities market. The company's chief risk officer outlined "a series of grave problems with respect to UBS's auction-rate securities market," Cuomo said.
After reading the email, Aufhauser asked two other UBS lawyers to set up a meeting to discuss the issues and then emailed his financial advisor, directing him to sell all of his auction-rate holdings, Cuomo said.
On Dec. 17, Aufhauser reiterated his instruction to his broker to sell the securities and $250,000 of his holdings were sold on Dec. 18 and Dec. 21, Cuomo said. Cuomo claimed Aufhauser's trading violated New York's general business law.
Johnson, Aufhauser's spokesman, said the 2007 auction-rate transaction resulted in "absolutely no personal profit" for Aufhauser.
"In addition, UBS stated in July that after an extensive investigation earlier this year, the company's independent outside counsel determined that Mr. Aufhauser's transactions were lawful," Johnson said.
Rohini Pragasam, a UBS spokeswoman, said Aufhauser left the firm at the end of September and declined further comment.
"We do not comment on matters between the New York AG and individuals," Pragasam said.
-By Chad Bray, Dow Jones Newswires; 212-227-2017; chad.bray@dowjones.com
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(END) Dow Jones Newswires
October 07, 2008 15:00 ET (19:00 GMT)