UBS Lawyer's Trades Could be Precedent-Setting

The resignation of UBS’s top U.S. lawyer, David Aufhauser, raises an interesting question of insider trading. While no charges, and certainly no criminal charges, have been bought against Aufhauser, a civil complaint filed by New York Attorney General Andrew Cuomo suggests that the UBS lawyer, a former Treasury official, sold off his personal stake in auction-rate securities just after he learned that the entire market for these supposedly liquid instruments was about to collapse.

Bloomberg summarizes the facts:

Cuomo’s complaint against UBS, filed at state court in Manhattan, says Executive A e-mailed his personal financial adviser Dec. 14, saying ‘I want to get out of ARCs,’ the same day he was e-mailed a copy of a message from UBS’s chief risk officer to the company’s CEO about a series of problems with the auction-rate market. By Dec. 21, he had sold all $250,000 of his auction-rate securities.

It apparently didn’t take “Executive A” (believed to be Aufhauser) long to figure he’d done something wrong. As Bloomberg reports, “Executive A repurchased the same securities on Feb. 12, after he questioned the ‘propriety’ of another executive’s trades in the debt, the complaint said. A day later, UBS stopped supporting its auctions.”Normally, insider trading (which is not always illegal) involves buying or selling shares of a particular security by someone armed with knowledge of a particular company. Charging someone with fraud based on his insider knowledge of an entire market is pretty much unheard of. But there’s a first time for everything.

UBS said it doesn’t think anyone at the bank did anything illegal here. But the last thing that UBS needs is a lawyer who, instead of arguing precedents, is a precedent himself.