By Heather Landy
Special to The Washington Post
Wednesday, October 8, 2008
NEW YORK, Oct. 7 -- On a Friday evening in December on the Amtrak Acela train from New York to Washington, David Aufhauser opened an e-mail from the chief risk officer at UBS flagging problems in the market for auction-rate securities.
Aufhauser, then UBS's general counsel, immediately forwarded the e-mail to two other lawyers for the Swiss bank. Minutes later, he e-mailed his broker at UBS to say he wanted to sell his auction-rate holdings.
Aufhauser sold $250,000 of the securities the next week. On Tuesday, he became the first senior Wall Street figure to settle insider trading allegations stemming from a breakdown in the auction-rate market.
New York Attorney General Andrew M. Cuomo said the $6 million bonus that Aufhauser planned to collect this year from UBS would be turned over to the state instead. Aufhauser must pay an additional $500,000 penalty, and he will be barred for two years from working in the securities industry, serving on the board of a public company or practicing law in New York.
Aufhauser, a District resident and former general counsel at the Treasury Department, neither admitted nor denied wrongdoing.
"We are pleased to have reached this amicable agreement and avoided a potentially lengthy litigation," a spokesman for Aufhauser said. The December note sales "resulted in absolutely no personal profit and did not involve any public investors. 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."
Cuomo, meanwhile, said he will continue to investigate other executives' activities in the auction-rate market. He also indicated that his office would examine the conduct of Wall Street executives in areas beyond the auction-rate market.
"If you have situations where senior executives acted improperly, they have to be held accountable. To the extent that there were parachutes or bonuses received, they should be recouped," Cuomo said. Scandals in the auction-rate market are only "a chapter in the story of what happened on Wall Street."
Cuomo began investigating UBS in April as part of a wider probe into the auction-rate securities market, where borrowers could sell notes with interest rates that were reset as often as once a week at auctions run by securities firms.
The market operated in relative obscurity until a credit crunch sapped demand for the securities and auctions began failing, leaving investors unable to cash in their holdings. Cuomo sued UBS in July and threatened legal action against other firms accused of fraudulently marketing the securities as safe, liquid investments.
UBS agreed in August to buy back as much as $18.6 billion of auction-rate notes from customers. Cuomo's complaint against the firm also alleged that seven UBS executives dumped auction-rate securities from their personal accounts while the firm continued to market the notes to clients. One of those executives was Aufhauser. The others have not been identified.
Aufhauser resigned from his post at UBS in August but stayed on as a consultant through September.
He has been a member of the District bar since 1978.
"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," his spokesman said. The settlement "will allow him to close the door on what was an unfortunate incident and move on with his life."