New York State on Thursday filed a multibillion securities fraud lawsuit against
for allegedly overstating to investors the safety of auction rate securities.
Attorney General Andrew Cuomo said in the suit that UBS presented the instruments as if they were cash equivalents on clients account statements. The suit, brought against
UBS Financial Services
, alleges that as the market began to reverse for the instruments, top UBS executives unloaded personal ARS holdings to the tune of $21 million, while continuing to aggressively market them.
UBS denied any wrongdoing. Spokesperson Katrina Byrne said in a company statement said that UBS conducted its own internal investigation into personal holdings of ARS and did not uncover any illegal conduct, but admitted to finding cases of poor judgment by certain individuals.
"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," she said.
The lawsuit seeks to require UBS to buy back auction rate securities from defrauded customers at par. It also seeks disgorgement of ill-gotten gains, restitution and other damages, and injunctions from further violations of New York's Martin Act.
Byrne noted UBS "was first to offer" affected clients loans of up to 100% the original value of their ARS holdings at preferred rates. "UBS has dedicated significant resources and substantial effort to find solutions for its clients in this unprecedented ARS market crisis," she said. "UBS has acted in the clients' best interests in this matter. "
An auction rate security is a debt instrument in which the interest rate is determined by a Dutch auction. If there are not enough orders, the auction fails and the rate defaults to the highest amount.
Issuers liked the bonds because they were quick, low-cost ways to get financing. Buyers liked the slightly higher yields and at the time, higher ratings. Many municipalities used the bonds as a way to quick capital, like New York City Water, which recently redeemed its bonds to more traditional variable rate demand notes.
The New York lawsuit notes UBS was a market leader in ARS sales and had more than 50,000 accounts, including 7,000 New York accounts, as of February 2008. But it says UBS stopped supporting the auctions in February of 2007 and began to look for ways to address the floundering market. It charges that UBS attempted to get the illiquid bonds off the UBS books and sell them to unsuspecting clients.
Byrne said the company "categorically rejects" the allegation that it engaged in "widespread campaign" to shuffle unwanted assets off on clients. " Our records demonstrate that UBS built up its own inventory of ARS from $5.9 billion at the end of 2007 to approximately $11 billion at the end of 1Q08, while Wealth Management US clients were reducing their positions," she said.
In March, the State of Massachusetts securities regulator subpoenaed UBS as well as
Bank of America
for information relating to ARS sales. Just last week, securities regulators from the state of Missouri raided offices of
as part of an ARS investigation.