Face Morphology, Budget Fail, and Repo 105

It's a short trading week going into Christmas, and there's plenty of odd little things happening in the news.

Right off the bat, UBS is in the news. Not for $17.2 billion in losses, or for $50 billion in mortgage writedowns, or for rolling over and releasing depositor information to the IRS (this time), or for the possibility that they will crush the Swiss economy. No, this time it's all about their dress code, and it includes highlights such as:

• "Leave, if possible, your outfit suspended in open air for two days after wearing. The fibers will gain rest and you will prolong the life span of your clothes."
• "At the neck, the shirt must be of sufficient magnitude to leave a space of at least one finger... The neck shirts must exceed approximately about 1 to 1.5 centimeter above the jacked collar..."
• "Don't wear the tie if it's not adapted to the morphology of the face."
• "Hands - do not have false nails and fancy colored nails"
• "Hair - don't have split ends"

Yes. It's nice to know they're focusing on what's important in this era of rising mistrust of financial institutions.

Despite concerns from Friday, North Korea has not felt "any need to retaliate against every despicable provocation", and did not end up reigniting the shooting part of the as-yet unresolved Korean Conflict. South Korean financial markets remain calm but concerned, but the cost of insuring South Korean sovereign debt is up 10%.

The United States still does not have a budget. The Senate is going to try and pass a temporary funding measure to get the government through to March 4, 2011, when it will be someone else's problem.

Ernst & Young LLC are about get sued by the New York State Attorney General's office over the collapse of Lehman Brothers. Why? Because Ernst & Young apparently advised them to use an accounting technique (Repo 105), which allowed them to hide $50 billion in liabilities. How? It would enter into repurchase agreements in which it would take (say) $100 in short term loans for each $105 in bonds it sold. Now, normal repurchase agreements are treated as collateralized short-term loans for accounting purchases (which is what they are). These "repo 105" repurchase agreements, because they're "sold" at a loss, get to be treated as actual sales on the books. So, they would sell under repo 105 just before the end of the quarter, take the "proceeds" of the "sales" to pay down debt, report that their end of quarter balance sheets looked pretty good, and then borrow money a bunch of money to buy the bonds back. It's not illegal, but the New York AG feels it was distinctly fraudulent.

UBS Accused of Aiding in Madoff's Fraud

UBS Accused of Aiding in Madoff's Fraud

Article published on November 29, 2010

UBS is facing a $2 billion lawsuit from the trustee charged with recouping money for Bernard Madoff’s victims, who claims the firm “lent an aura of legitimacy” to Madoff’s Ponzi scheme. So reports the Wall Street Journal.

Irving Picard filed 23 counts of financial fraud and misconduct against UBS and related entities in a New York bankruptcy court on Wednesday, claiming UBS actively participated in the scam. The firm denies any wrongdoing.

The suit was filed in redacted form because UBS has designated as “confidential” information related to its dealings with Madoff. Picard has accused UBS of “trying to shield this information from the public.”

Picard issued a statement saying he intends to file a court application to have the confidential designation removed “and the complaint made public as soon as possible,” Bloomberg reports.

Picard says the bank’s involvement gave legitimacy to several global feeder funds by acting as their sponsor, custodian and administrator. He says UBS sidestepped legal responsibility for the actions of those funds by employing undisclosed indemnity agreements.

Picard claims UBS had inklings that fraud was taking place but still installed Madoff as the sub-custodian of the feeder funds, giving him the power to value the funds, the Journal reports.

David Sheehan, Picard’s counsel, says Madoff's scheme would not have been as successful if UBS had not “agreed not only to look the other way, but also to pretend that they were truly ensuring the existence of assets and trades when in fact they were not and never did.”

UBS on Wednesday called the allegations "completely unfounded and without merit,"

Picard is looking to recover redemptions and fees, as well as damages and disgorgement from UBS, according to Bloomberg.

The lawsuit also names the bank’s UBS (Luxembourg) SA unit and feeder funds including LuxAlpha Sicav and Groupement Financier. LuxAlpha lost 95% of its approximately $1.4 billion in assets and was dissolved four months after Madoff’s arrest in December 2008. LuxAlpha liquidators are also suing UBS and Ernst & Young, the fund’s auditor, for the return of lost assets, Bloomberg reports.

Picard alleges Luxalpha, Groupement Financier and other European feeder funds withdrew more than $1.1 billion from the Madoff funds in the six years before Madoff’s arrest; $796 million was withdrawn in the final 90 days, the New York Times reports.

Meanwhile, bail was set last week at $5 million for Madoff’s former secretary, Annette Bongiorno, who is accused of helping conceal the fraud, the Associated Press reports.

Bongiorno was arrested in Florida earlier this month and is charged with conspiracy and securities fraud. She was released under house arrest after friends and relatives posted her bail, the New York Daily News reports.

Prosecutors claim Bongiorno helped Madoff defraud his wealthy clients for decades. It is also alleged she withdrew more than $14 million for herself.

Bongiorno denies any wrongdoing, the AP reports.

By Kathleen Laverty

To read the New York Times article cited in this story, click here.

To read the Associated Press article cited in this story, click here.

To read the Wall Street Journal article cited in this story, click here if you have a paid subscription.

To read the Bloomberg article cited in this story, click here.

To read the New York Daily News article cited in this story, click here.

(News summaries based on original reports in other publications are prepared by the FundFire staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.)