By Jason Simpkins
New York State Attorney General Andrew Cuomo has brought a multi-billion lawsuit against UBS AG (UBS), accusing the Swiss banking giant of pushing billions of dollars in auction-rate securities onto ordinary investors as the market collapsed earlier this year.
UBS routinely presented the troubled auction-rate securities as safe, short-term liquid investments even as a senior executive at the bank called the market “a complete loser,” the civil complaint filed by Cuomo alleges.
The suit is yet another blow for the Zurich-based bank, which is also under investigation by U.S. Department of Justice to determine whether UBS helped American clients dodge paying U.S. taxes.
“Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behavior will not be tolerated,” Cuomo said.
Auction-rate securities are preferred shares or debt instruments such as corporate or municipal bonds. They have a long-term maturity and are sold at monthly or weekly auctions, and until recently were treated by many investors as cash investments. However, in February, the auction-rate security market collapsed, bringing auctions to a halt and leaving investors with $330 billion in illiquid investments.
UBS halted auctions on Feb. 13, leaving more than 50,000 of its customers with $37 billion in unmovable auction-rate securities, according to Cuomo’s filing. The lawsuit further alleges that UBS officials knew the market was under considerable strain as early as December and began unloading the debt to ordinary investors. Seven executives sold $21 million of their personal holdings in the market to avoid losses, the complaint says.
"Once they knew the auctions were failing, they removed their personal money and corporate money from the auctions and were still bringing consumers into the auctions," Cuomo said. “You can't have two sets of rules – one set of rules for customers and one for senior officials.”
No charges have been filed against individuals, but the state of New York is asking that UBS buy the securities back from its customers at face value.
“They want their money back,” Cuomo said. “My job is to get their money back.”
UBS has denied any allegation that there was a widespread effort to move its inventory of auction-rate securities from its books and insisted that investors were fully informed of the risks associated with the purchase of said securities.
“We will vigorously defend ourselves against this complaint,” UBS said. “It is frustrating that the New York attorney general has filed this complaint while we have been fully engaged in good faith negotiations with his office to bring liquidity to our clients holding auction-rate securities.”
New York is the third state to take action against UBS over its auction-rate market, as William Galvin, the secretary of the Commonwealth of Massachusetts, and the Texas State Securities Board have also brought litigation against the bank. However, Cuomo’s case could pose a bigger threat to UBS, which has its bond desk in New York. Cuomo could, in effect, bring a case against the bank on behalf of UBS customers everywhere.
Bank of America Corp. (BAC), Merrill Lynch & Co. Inc. (MER), and Wachovia Corp. (WB), which recently had its St. Louis offices inspected by Missouri state securities regulators, could also face litigation over auction-based securities in coming months, the International Herald Tribune reported.
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