Wednesday, February 13, 2008

UBS Warburg

Based in Switzerland, UBS Warburg is one of the world’s foremost financial firms. Among its various connections to other companies, it serves as sister company to Paine Webber, Inc., providing the latter with research and analysis. In 2002, both companies were named in a class action lawsuit filed by former investors, who allegedly suffered losses as a result of actions perpetrated by UBS.

Why was UBS accused of fraud?

UBS Warburg was accused of knowingly deceiving investors when it rated Enron’s stock as a “strong buy” during a period in which Enron was headed for certain disaster. Enron’s own employees were the biggest victims in the alleged scheme; through an arrangement with UBS Warburg’s sister company, Paine Webber, they were encouraged to invest their 401(k) contributions in Enron. Plaintiffs say that the arrangement forbid Paine Webber’s brokers from warning these employees about the pending downfall of their employer. Plaintiffs cited one broker’s dismissal as evidence of this: Chung Wu was fired, they claim, after advising investors to “diversify” their investments. The defendants say Chung was fired because his advice was unauthorized.

The suit alleged that appalling debt and credit problems were clear “red flags” of Enron’s impending doom, and that UBS Warburg therefore should have avoided rating Enron as a strong buy. Plaintiffs in the suit claimed that UBS Warburg waited until four days prior to Enron’s bankruptcy filing before warning investors. By doing so, said the plaintiffs, UBS and sister company Paine Webber, Inc. were able to collect more fees from their client, Enron. The companies were accused under both Section 10(b)(5) and Sections 11 and 12 of the Exchange Act, which prohibit misrepresentation.

UBS Warburg and Paine Webber countered that the information they were accused of hiding from investors was available to the public. They said that the plaintiff’s accusations were based on speculation as to their knowledge of facts that went beyond this information.