ARS UPDATE: Former UBS Sales Manager David Shulman Gets Off Easy

Are cracks developing in the Wall Street facade covering the fraud which encompassed the auction-rate securities market? While thousands of investors with upwards of $150 billion remain frozen in their auction-rate securities holdings, a hint of progress seems to be developing on the legal front addressing this sector. How so?

David Shulman, former sales manager at UBS, just settled an outstanding claim that he effectively front ran the ARS market in December 2007. This claim was brought by New York Attorney General Andrew Cuomo. Bloomberg highlights this story in writing, Former UBS Muni Chief Settles Probe for $2.75 Million:

David Shulman, UBS AG’s former global head of municipal securities, agreed to pay $2.75 million to settle a probe by New York Attorney General Andrew Cuomo in connection with the sale of auction-rate securities before the market collapsed in February 2008.

Shulman, who was also UBS’s fixed-income chief for the Americas, led the sales effort to cut the bank’s inventory of auction-rate securities, according to Massachusetts Secretary of State William Galvin, who sued the company in June 2008. New York sued a month later.

“The pressure is on to move inventory,” Shulman said in an Aug. 30, 2007, note, according to the Massachusetts complaint, which discloses e-mail exchanges between Shulman and other UBS executives that show how the company began to “mobilize the troops” after hazards of the securities were identified last August.

Shulman officially left the Zurich, Switzerland-based bank in August 2008, the same month UBS AG agreed to pay $150 million and begin buying back $18.6 billion in the failed securities to settle with federal and state regulators, including New York and Massachusetts. The bank was among those accused of falsely marketing the bonds as safe, liquid investments.

States began to investigate auction rate securities in 2008 after the then $330 billion market collapsed, leaving investors unable to sell securities that UBS and other brokerages marketed as equivalent to cash. Settlements with more than 10 broker- dealers led to more than $61 billion in investor buybacks, according to Cuomo.

Shulman is not the only high-level UBS executive to settle with Cuomo. David Aufhauser, a former top U.S. lawyer for UBS AG, agreed in October 2008 to pay $6.5 million to settle insider-trading claims by Cuomo. Aufhauser, who once served as general counsel to the U.S. Treasury, sold his holdings of the instruments “minutes” after learning nonpublic information about disruptions in that market, Cuomo alleged in an e-mailed statement when Aufhauser settled.

Cuomo accused Shulman of selling his own auction rate securities based on insider information. Between Dec. 11 and Dec. 13, 2007, Cuomo said, Shulman learned the securities were in distress and that there was concern that upcoming auctions in student loan auction rate securities could fail.

Shulman owned $1.45 million in student loan auction rate securities, which were scheduled to be sold in late December and early January, Cuomo said. On December 13, 2007, Shulman instructed his broker to immediately sell his holdings in student loan auction rate securities, before the upcoming auctions could occur.

In his suit, which also settled, Cuomo accused seven unidentified UBS executives of selling $21 million in personal holdings of auction-rate securities while the company pushed the instruments to customers.

Firms including UBS abandoned their routine role as buyers of last resort for the instruments in mid-February, letting the $330 billion market break down.

“While UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals,” the bank said in July 2008.

I personally think that Shulman got off easy on this claim. Do you think the investor who purchased Shulman’s bonds and may still not be able to access his cash would feel this settlement is fair and equitable?

I empathize with all ARS investors. For their benefit, Shulman’s settlement is actually a non-event. What is important that may potentially come out of this development? Whatever facts Cuomo may have learned in this process. Information is everything.

Did Shulman or other UBS executives point Cuomo in the direction of where more bones may be buried? Can Cuomo now go after even bigger fish?