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(Updates with V10 scrutiny, product description beginning in second paragraph.)
(Bloomberg) -- The U.S. Justice Department is looking into whether UBS Group AG misled clients in the marketing and selling of some foreign-exchange structured products, according to people with knowledge of the situation.
Investigators have offered so-called proffer agreements to some UBS employees in recent weeks as they look into the UBS V10 Enhanced FX Carry Strategy, a product sold to institutional investors such as hedge funds and pension funds, according to one of the people, who asked not to be identified because the interviews are private. The Justice Department is investigating the V10 product to determine whether the bank misrepresented to clients the profits it was earning on the foreign currency basket, a person familiar with the matter said, asking not to be identified because the probe is confidential. The scrutiny is part of authorities’ wider probe into manipulation in the foreign-exchange market.
The V10 product first arose in the Justice Department’s interviews with UBS employees in 2013, with investigators examining commissions on the product and whether the bank honored its fiduciary duties to clients, according to one of the people. The questions were raised again in recent weeks as the agency sought to secure proffer agreements, the person said. The deals allow a witness or defendant to give federal prosecutors evidence on the condition they won’t use it against them.
Authorities around the world are probing the $5.3 trillion- a-day currency market. Six banks including UBS paid $4.3 billion to regulators in the U.S., U.K. and Switzerland in November in the first round of settlements. UBS will probably be the first bank to reach an agreement with the Justice Department after securing leniency in the antitrust side of the case because it was first to cooperate, people with knowledge of the probes have said.
The V10 inquiry is a focus of the Justice Department’s fraud section, which is looking at representations made to bank clients in the currency market, one of the people said. The department’s antitrust division, which is investigating whether traders colluded to fix currency benchmarks, is at a more advanced stage, the person said.
A settlement for the Zurich-based bank ending the Justice Department’s fraud and antitrust probes is still months away, according to one of the people.
UBS fell less than 1 percent to 16.10 Swiss francs in Zurich trading. It has declined 5.8 percent this year.
Attorney General Eric Holder said in November that the U.S. was close to announcing criminal and civil resolutions in the currency investigation. Banks had a December deadline to disclose wrongdoing to prosecutors, a person with knowledge of the probe said at the time.
A spokesman for UBS and Emily Pierce, a Justice Department spokeswoman, declined to comment.
The V10 strategy allowed investors to profit from the interest-rate gap within the Group of 10 countries by borrowing in currencies with low rates and investing the funds in higher- yielding ones. Investors profited by pocketing the difference between interest owed on the borrowed funds and interest earned from their investments. The positions were adjusted on a daily basis using an algorithm developed by UBS.
The V10 product “allows an investor to potentially profit in moves in 10 of the most liquid major currencies by taking advantage of opportunities based on interest rate differentials,” according to a 2009 UBS publication.
The Financial Times reported earlier on the investigation into structured products at UBS and Barclays Plc, which has an “optimized currency carry strategy” similar to the V10 product. A spokesman for Barclays declined to comment on the report.
Barclays withdrew from the November settlements on the eve of their announcement after New York’s Department of Financial Services refused to join. Benjamin Lawsky, chief of the DFS, viewed the deal as not being hard enough on the London-based bank, a person with knowledge of the talks said at the time.
A monitor has been appointed to review Barclays’s continuing conduct, and the New York regulator is looking into whether algorithms were used to manipulate currency rates, another person said in December.
UBS has suspended a number of employees as a result of the currency probe from its offices in New York, Singapore and Switzerland. Eleven of its current and former traders in foreign-exchange and precious metals are also under investigation by the Swiss financial markets regulator.
--With assistance from Keri Geiger and Madeleine Lim in New York.
To contact the reporters on this story: Suzi Ring in London at firstname.lastname@example.org; David McLaughlin in Washington at email@example.com To contact the editors responsible for this story: Heather Smith at firstname.lastname@example.org; Sara Forden at email@example.com Edward Evans