UBS: Notes On A Wall Street Scandal

How the lines between stock research and marketing can still blur so easily

Mitchel S. Guttenberg looked like a model banker. The 42-year-old was an executive director at UBS (UBS ). He and his wife, Susan, have an apartment in Manhattan and a $1 million home in the Hamptons. They were top donors to Learning Leaders, a charity that pays for tutoring services for New York City public school children.

But federal prosecutors allege that for five years, Guttenberg has been padding his $300,000 or so annual salary by selling confidential stock research. On Mar. 1, they charged him with masterminding an insider trading scheme in which he allegedly tipped off two traders to upcoming ratings changes on hundreds of stocks—allowing them to trade ahead of the news. People close to the investigation say Guttenberg pocketed more than $1 million in cash, all told. He got the inside dope, say authorities, from his perch on an elite committee at UBS that signed off on all upgrades and downgrades.

Prosecutors are trumpeting the arrests of Guttenberg and 12 others as the biggest trading scandal since the days of Ivan F. Boesky. But there's a big difference between Guttenberg and Boesky, a master Wall Street trader. Despite the title, Guttenberg was essentially a glorified marketing executive, say people familiar with his duties. One person referred to him as a "traffic cop," responsible for making sure research was directed to the right investors. Other parts of his job: lobbying large institutions to vote for UBS analysts in the stockpicking competitions run by Institutional Investor and other publications, as well as getting analysts more exposure in the media.

Trained as a broker, Guttenberg had an undistinguished record before joining UBS's team in 1999. Over the first 12 years of his career he flitted from job to job, starting out at Lehman Brothers Inc. (LEH ) and Bear, Stearns & Co. before moving on to Axiom Capital Management Inc. and First Albany Corp. (FACT )

He seemed to have found his groove at UBS. Two years after joining the Switzerland-based firm, which has 78,000 employees worldwide, he was tapped to serve on its prestigious 12-member investment research committee. It was a plum assignment reflecting a high level of trust. Authorities allege the insider trading scheme was hatched during Guttenberg's first year on the committee. He's currently on unpaid leave after pleading not guilty to six counts of securities fraud and conspiracy and posting a $500,000 bond. His lawyer, Sean O'Shea, declined to comment.

How could UBS seemingly have gone so wrong in elevating Guttenberg to such a sensitive post? While the firm declined to comment, there was little in his past to indicate he would engage in anything like the scheme described by prosecutors. In 1986 he ran afoul of Wisconsin regulators over an allegation he was selling stocks without the proper license. In 1997, while at Axiom, he was named as a defendant in a $2 million arbitration claim filed by a big investor that alleged excessive trading in its account. Guttenberg was dropped from the dispute because he was only a "sales assistant," and the claim was subsequently dismissed. Four years later, he was sitting on the investment research committee at UBS.

Banks need to pick candidates for their most sensitive committees more carefully. "You'd think they'd be full of super analysts," says Jacob Zamansky, an attorney who has taken part in arbitration cases involving analysts and investors. "But it's my impression there is [a lot of] marketing associated with these committees." Wall Street rarely discusses its rating process.

The irony is that Wall Street firms paid $1.4 billion in 2003 to settle charges that analysts had conspired with investment bankers to issue favorable ratings. In effect, the outfits had been using stock research to sell themselves to prospective investment banking clients. But as the UBS scandal shows, Wall Street's pitchmen may still find ways to overstep their bounds.

By Matthew Goldstein

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