UBS Charged with "Dishonest and Unethical" Practices Regarding Hedge Fund Clients

We’re shocked,shocked! The state of Massachusetts has filed a complaint that accuses UBS of giving kickbacks (without using that word) to hedge fund clients: cheap rent, personal loans at below-market interest rates, and other goodies.

An interesting question is whether the charge regarding below-market rent referred to incubators. Some prime brokers will give fledgling hedge funds cheap office space and other services, typically in return for a minority interest in the fund’s management company. If Massachusetts is taking a dim view of that practice, it will find other targets.

This pales compared to the Bear meltdown. If the action is successful, it constitutes a black eye for UBS. But it shows that regulators are taking a much tougher look at hedge funds and prime brokerage operation. They are starting to turn over rocks and are certain to find more squiggly things beneath them.

From Bloomberg:

UBS Securities LLC, the investment- banking division of Switzerland-based UBS AG, was accused by Massachusetts regulators of “dishonest and unethical” practices in dealings with hedge-fund advisers.

The subsidiary, based in Stamford, Connecticut, gave hedge- fund advisers below-market rent, low-interest personal loans and other benefits to keep and develop business, according to a statement today by William Galvin, the secretary of the commonwealth and its top securities regulator.

“Unbeknownst to the pension funds, university endowments, charitable foundations, institutional investors and individuals who invest in hedge funds, the gifts and gratuities for the hedge-fund advisers come with implicit and sometimes explicit quid pro quos,” Galvin said in an administrative complaint.

The complaint also charges UBS with failure to supervise its employees’ giving of gifts and gratuities. The action, filed with the state’s Securities Division, seeks a cease-and-desist order, a censure and an undisclosed administrative fine, the statement said.

Doug Morris, a UBS spokesman in New York, declined to comment.

The investmen

t-banking firm is accused of violating the Massachusetts Uniform Securities Act, said Brian McNiff, a Galvin spokesman.

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