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UBS Settles Fund Charges

The case involves a group of ex-brokers who have since successfully sued Merrill Lynch.


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will pay a $54 million fine to settle a regulatory investigation into allegations that a group of former brokers engaged in abusive mutual-fund trading.

Ironically, the settlement with regulators involves the same group of brokers that was recently awarded $14 million in damages by a

New York Stock Exchange

arbitration panel. The brokers, who had moved from UBS to

Merrill Lynch


, sued Merrill, claiming they were wrongfully terminated in October 2003 because of their trading activity.

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UBS, in settling with the NYSE and New Jersey state regulators, neither admitted nor denied the allegation that it had failed to properly supervise the broker.

The brokers moved on to Merrill Lynch in 2001, after UBS instituted a policy that prohibited its brokers from engaging in market-timing, or the frequent trading of mutual fund shares.

The regulatory settlement with UBS could bolster a lawsuit Merrill has filed in New York state court that seeks to overturn the recent arbitration decision. Many in the legal community and on Wall Street found the arbitration decision puzzling in light of the more than three-year crackdown by regulators on abusive mutual fund trading.

The arbitrators, following a 28-day hearing, ruled that Merrill Lynch had defamed William Savino, Christopher Chung and Kevin Brunnock by telling the news media that the brokers were fired for violating firm policy prohibiting the market-timing, or frequent trading, of mutual fund shares. In an unusual move, the arbitrators characterized $12.5 million of the award as compensation for "pain and suffering.''

The New Jersey settlement with UBS mentions Chung and Savino by name but doesn't mention the third broker, Brunnock.

The brokers had argued that Merrill Lynch was well aware of their trading activity and only objected once New York Attorney General Eliot Spitzer began looking into abusive mutual fund trading.

Merrill Lynch, in its own settlement with New Jersey regulators, paid $13 million for failing to supervise the brokers, who allegedly helped conceal more than 3,700 market-timing trades for Israel Englander's Millennium Partners hedge fund.

Last month, Englander and his $5 billion hedge fund agreed to pay $180 million in fines and restitution to settle an investigation into its abusive trading practices.

New Jersey regulators still have a pending administrative lawsuit against the three former brokers. Sources say the state is expected to soon add charges arising from their conduct at UBS to the pending complaint.