Capital Markets

Mass. Sues UBS over Auction-Rate Securities

Investors allegedly said that the bank told them the money invested in auction rate securities would be 100 percent principal-protected and complet...
Stephen TaubJune 26, 2008

Massachusetts regulators have sued UBS over its sales of auction rate securities. In an administrative complaint filed Thursday, the securities division of the state secretary’s office wants to return to investors money they invested in ARS at par and pay those investors who have had to sell at below par.

UBS would also be ordered to cease and desist from further violations of the Massachusetts Uniform Securities Act and be censured and could face an administrative fine, according to the complaint issued by the office of Secretary of the Commonwealth William Galvin.

Investors began complaining to the securities division in February, according to the complaint. They allegedly told the division that UBS told them the money invested in auction rate securities would be 100 percent principal-protected and completely available to them, subject to the timing of the auctions that would occur every one to three weeks.

These instruments, described by UBS as “cash alternatives” or “money market instruments,” were pitched to retirees looking for a safe and readily available investment, as well as small business owners seeking to invest cash that could quickly be obtained for operational expenses or future projects, according to the complaint. “What they were not told is that in many auctions the interest rate was not actually set through the auction process,” the complaint said.

For its part, UBS “continued to support the auction rate securities market longer than any other firm,” bank spokesperson Kris Kagel responded to the charges in an E-mailed statement. “We held approximately $10 billion worth of ARS at the end of 1Q08. We have offered our clients loans of up to 100 percent of the par value of their ARS holdings at preferred lending rates. UBS, our clients and clients of other industry participants all share the impact of this unprecedented loss of liquidity in the ARS market.”

UBS plans to defend itself against the “specific allegations” of the complaint, according to Kagel. “We are disappointed that the Massachusetts Securities Division has filed this complaint against us, as we, our peers and the industry work toward solutions.”

The secretary charged, however, that the bank “actively managed the interest rates so that they would be just high enough to move the auction rate securities it had underwritten but not so high as to make the issuers that were its underwriting clients unhappy.”

According to the regulator, the investors were not told that these sales were the cornerstone of UBS’s inventory-reduction program at a time when UBS was considering abandoning the auction markets.

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