UBS' Legal Life After French Ruling

After years of delay, UBS is poised to put to rest a French investigation into money laundering and tax offenses. Its appeals ruling – due shortly after midday on Monday – comes just weeks after Barbara Levi took over as chief counsel, from long-standing lawyer Markus Diethelm, the architect of UBS' post-financial crisis legal clean-ups.

Financially, France may hurt: it has stowed 450 million euros ($507 million) against a potential multi-billion euro penalty. It has posted 1 .1 billion euros in «caution,» or corporate bail.

The potentially more harmful side effect may be if UBS is convicted of money laundering – not a good look for the world’s largest wealth manager in one of its biggest European markets. More importantly, a conviction on the charges may lead clients in U.S. public pensions or major institutional clients in Asia to reconsider their business with UBS.

The «French» problem can theoretically happen in any of UBS’ big European markets. UBS recently settled a similar investigation in Belgium for a comparatively mild 49 million euros. The wealth manager lists «inquiries regarding cross-border» private banking prominently in its litigation issues – the question is whether other countries would pursue UBS (or other Swiss banks) as doggedly as Parisian prosecutors have.

One already has: Italy levied an 1.5 million euro fine against UBS last September, which the bank is appealing, it disclosed in the annual report of its European bank. Several current and former employees in Italy as well as the Italian branch are «the subject of criminal and administrative legal proceedings,» the bank said.

After France, this U.S. investigation remains UBS’ most vulnerable spot which could reportedly cost billions to settle: it is accused of defrauding investors by selling residential mortgage-backed securities in the run-up to 2008/2009. A big part of the Swiss bank’s argument is that it wasn’t a major issuer, as big U.S. banks were, and itself suffered damages of the crisis-era instruments.

The court case isn’t expected to be heard anytime soon – and may yet be settled outside of court, as rivals like Barclays have done. UBS has stowed an undisclosed amount against a potential fine.

The Swiss wealth manager kissed off at least $860 million when the U.S. family office-hedge fund run by ex-«Tiger Cub» Bill Hwang (pictured below) collapsed in March. A pittance compared to the more than $5 billion Credit Suisse sent down the drain, it is nevertheless striking for UBS – a far more conservative wealth manager than its crosstown rival.

The bank apologized and isn’t expected to subject itself to the same invasive treatment as did Credit Suisse, which released an excoriating report conducted by outside examiners. However, UBS can be expected to give some clarity on how Archegos was able to wreak the considerable damage it did.

Also, as U.S. regulators probe how the Archegos unwind hit so much of Wall Street, UBS may be subject to higher capital requirements on prime brokerage – a fate that Credit Suisse is spared, because it is exiting the business.

Puerto Rico:

UBS faces a slew of lawsuits from investors who lost money on bonds issued by the U.S. territory which lost roughly $3 billion in value in a major sell-off. Its bankers are accused of neglecting their fiduciary duty to clients.

The bank’s previous CEO Sergio Ermotti in 2018 conceded to broadcaster «CNBC» that UBS «could have done things better». The issue is less financially stunning for UBS than France or RMBS because most of the litigation is being handled individually, and sums are comparably smaller.

An eight-year-old investigation into how UBS and other global investment banks allegedly rigged foreign exchange markets or colluded on Libor rates forms the most voluminous share of the Swiss bank’s litigation risks on paper, but it is one of the least meaningful for shareholders.

The main reason is that UBS blew the whistle on its peer group in exchange for milder treatment and in some cases full immunity. The settlements continue to trickle through for various jurisdictions including Hong Kong, the U.S., and Singapore. Notably, the Swiss anti-trust watchdog doesn’t recognize UBS’ full immunity.

The bank was wrong-footed by the possibility that criminal charges in a revived money laundering investigation might be levied against CEO Ralph Hamers.

The 55-year-old Dutch banker two months ago passed a key test to putting the matter to rest definitely.

However, both the bank as well as Diethelm, who is spearheading the issue even after handing over to Levi last month, won't breath easy until the threat of charges against the CEO is banished.