UBS Sued By N.Y. AG For ARS Fraud

UBS is facing the first nationwide lawsuit regarding auction-rate securities compliments of the New York Attorney General, who sued the firm for securities fraud.

UBS is facing the first nationwide lawsuit regarding auction-rate securities (ARS)compliments of the New York Attorney General, who sued the firm for securities fraud.

Attorney General Andrew M. Cuomo charged UBS Securities LLC and UBS Financial Services with falsely selling and marketing auction-rate securities as safe, highly liquid and cash-equivalent securities. This is the first time Cuomo’s office has gone after a securities firm in the auction-rate securities fiasco. “Today, UBS customers are holding more than $25 billion in illiquid, long-term paper as a result of UBS’s fraudulent misrepresentations and illegal conduct,” says the AG’s press release today.

Cuomo follows Secretary of Commonwealth of Massachusetts William Galvin, who filed a lawsuit last month against UBS, seeking to force the bank to buy back at par the securities it sold to investors in the commonwealth, as the Massachusetts government likes to refer to the state. (In a separate case, UBS is being investigated by the federal government for illegally putting American citizens in offshore tax shelters; click here for the Forbes story on the sorry state of the offshore tax-dodge game.)

According to Cuomo, his investigation revealed that as the ARS market started to collapse, some of the bank’s top executives quickly sold-off $21 million in personal holdings of auction-rate securities, but continued to market the securities to its retail clients. Internal UBS emails subpoenaed by Cuomo detail top executives’ efforts to sell-off personal holdings of auction-rate securities, according to a press release issued by Cuomo’s office.

“Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag,” says Attorney General Andrew Cuomo.

Meanwhile, UBS says the lawsuit is frustrating since it’s been “fully engaged” in negotiations with Cuomo’s office, and plans to defend it self against the complaint. “It is well known that UBS continued to support the auctions longer than any other major firm. UBS was first to offer clients loans of up to 100 percent of the par value of their ARS holdings at preferred lending rates. UBS has dedicated significant resources and substantial effort to find solutions for its clients in this unprecedented ARS market crisis. UBS has acted in the clients' best interests in this matter,” says a UBS spokesperson.

For more on the ARS market and how advisors are dealing with the backlash, check out our cover stories from May and June.

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