* Legal reserves 2.368 bln Sfr at end-Q2
* Down from 2.727 bln Sfr in previous quarter
* Disclosure in second-quarter report
* Details widening U.S. probe into Puerto Rico unit (Adds detail on mortgage probe and French investigation)
By Katharina Bart
ZURICH, July 28 (Reuters) - U.S. authorities have widened a probe into bond funds sold by UBS’s Puerto Rico arm, the Swiss bank announced on Tuesday, alongside figures showing it has used up some of the money it set aside to cover legal costs and regulatory fines.
Zurich-based UBS’s legal reserves were disclosed in a ten-page section on pending litigation in its second-quarter report, a day after financial results.
They stood at 2.37 billion Swiss francs ($2.46 billion) at the end of June, down from 2.73 billion francs the previous quarter.
The reserves fell after UBS in May became one of four major banks to plead guilty to trying to manipulate foreign exchange rates in the $5-trillion-a-day currency market, paying $545 million in combined fines.
Other risks remain, however, including claims the bank misrepresented mortgage-backed bonds during the U.S. housing bubble, a French investigation into tax dealings and wealthy clients, and back taxes due to Brazil relating to when the Swiss lender owned an investment bank in the country.
UBS said it had bolstered provisions for the mortgage probe -- seen by analysts as one of the larger litigation risks facing the bank -- by 42 million francs to 772 million francs.
“The future outflow of resources in respect of this matter cannot be determined with certainty based on currently available information, and accordingly may ultimately prove to be substantially greater (or may be less) than the provision that we have recognized,” it said in its legal disclosure.
Funds linked to Puerto Rico bonds are another headache, after the bank earlier this month told clients they can no longer use the securities as collateral for certain loans after the island’s financial troubles resulted in downgrades by major credit rating agencies.
The bank said it was responding to inquiries from the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) over the practice by some of its customers -- and one bank adviser -- of using loans to invest in closed-end funds in Puerto Rico.
“We also understand that the Department of Justice is conducting a criminal inquiry into the practice of certain customers and a UBS financial advisor of using non-purpose loans to invest in closed end fund securities in violation of their loan agreements and UBS policies,” the bank said, disclosing this investigation for the first time.
It said it was cooperating with the investigations.
$1 = 0.9623 Swiss francs Editing by Muralikumar Anantharaman and Mark Potter