UBS Facing Subprime Banking Investigations: WSJ

U.S. government prosecutors are investigating whether Swiss banking giant UBS misled investors by reporting inflated prices of mortgage-backed securities it held despite knowing those valuations had eroded, the Wall Street Journal said Saturday.

The Journal, quoting unnamed sources familiar with the probe, said the investigation by the U.S. Attorney for the Eastern District of New York had not yet issued subpoenas.

But the sources noted that the New York prosecutors work closely with the U.S. Securities and Exchange Commission. The SEC recently expanded its own probes of both UBS and Merrill
Lynch pricing of mortgage securities, a move which empowers the SEC to issue subpoenas, they said.

UBS was not immediately available for comment. A Merrill Lynch spokesman had no comment.

UBS, Europe's hardest-hit bank from the credit crisis, last week raised its subprime write-downs to $18.4 billion.

On Friday, the bank also urged its shareholders to dismiss a plan from some dissenting shareholders demanding an external probe into the bank's subprime woes.

The U.S. Justice Department on Wednesday said it was looking into whether fraud occurred in the packaging and selling of complicated mortgage securities like collateralized debt obligations (CDOs), the Journal said.

The Federal Bureau of Investigation is looking at 14 unnamed companies in that probe, the agency said.

On Friday, the top securities regulator in Massachusetts filed a civil complaint against Merrill Lynch, accusing the brokerage of selling unsuitable subprime mortgage-related securities to the city of Springfield.

Massachusetts Secretary William Galvin seeks to take away Merrill's profits from a transaction in which it sold CDOs to the city. Merrill invested about $14 million of the city's money in CDOs last year, only to see most of the value erased.

Separately, the city of Springfield said on Thursday that Merrill had agreed to pay it $13.9 million after determining the city had not approved the purchase of the CDOs.

UBS remains under fire at home. Shareholder advocacy group Ethos in December called for more clarity from UBS over its subprime losses, urging an independent probe.

But UBS on Friday said there was no need for a separate investigation given that the country's EBK banking watchdog was already probing the reasons which led to its losses.

UBS last week stunned investors with its third round of subprime write-downs. It reported heavy fourth-quarter losses and a total 2007 net loss of 4.4 billion Swiss francs ($4.07 billion).