Federal criminal prosecutors in New York are investigating whether UBS AG misled investors by booking inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, according to people familiar with the matter.
The investigation, by the U.S. attorney in New York’s Eastern District in Brooklyn, is preliminary. The U.S. attorney’s office frequently works closely with the Securities and Exchange Commission to coordinate efforts to gather information. The New York prosecutors haven’t issued subpoenas, according to people familiar with the matter.
The SEC, deepening its own set of investigations into whether Wall Street firms improperly mispriced mortgage securities, recently upgraded probes of UBS and Merrill Lynch & Co. into formal investigations, people familiar with the matter say. This step, which requires approval of the full commission, gives the SEC broad subpoena power, or the authority to require firms and individuals to produce information.
Spokesmen for both UBS and Merrill declined to comment.
The investigations could raise the stakes for Wall Street in the multiple probes examining whether financial firms deliberately misvalued, or “mismarked,” massive holdings of mortgage securities. Most of the current investigations into mortgage matters involve civil authorities; the U.S. attorney launches criminal investigations and has a history of prosecuting Wall Street-related matters. Last summer, federal criminal prosecutors began investigating the collapse of two internal hedge funds at Wall Street firm Bear Stearns Cos.
There is also a broader effort by the Justice Department to look into whether there was fraud in originating, packaging and selling mortgage-related products. The Federal Bureau of Investigation has said it has opened criminal inquires into 14 companies as part of an investigation of the subprime-mortgage crisis. The FBI wouldn’t identify the companies under investigation.
Although prosecutors have expressed an interest in subprime matters, the criminal investigations might not result in the filing of any charges. Securities-valuation cases involve a fair amount of judgment based on an opaque market. To bring fraud charges, “prosecutors need proof to convince a jury beyond a reasonable doubt that the banks made materially misleading statements about securities, and proof that they did it with the intent to deceive,” says Christopher J. Clark, a New York white-collar lawyer and former assistant U.S. attorney in Manhattan in the securities and commodities fraud unit. To obtain an indictment, prosecutors would need probable cause, he adds.
Other regulators led by the SEC are examining whether financial firms should have told investors earlier about the declining value of such securities and how they priced them on their books, people close to the matter say.