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Home > Cases > UBS Auction Rate Securities >UBS Charged In Auction-Rate Securities Debacle

UBS Charged In Auction-Rate Securities Debacle

“The game was fixed; only the customers were in the dark.” — That statement by William F. Galvin, Massachusetts top securities regulator, confirmed what investors caught in the tangled web of auction-rate securities have said all along.

On June 26, they finally received a little bit of justice when Massachusetts securities regulators filed civil charges of fraud and dishonest conduct against UBS for misrepresenting auction-rate securities as cash-alternatives investments. The charges mark one of the first sets of government-fraud charges filed since the market for auction-rate securities froze up in February.

The 101-page complaint alleges UBS knowingly allowed its brokers to present auction-rate securities to investors as if they were safe and risk-free investments. The complaint also charges UBS with records violations based on “inexcusable delays” that the firm had in releasing basic records regarding their auction practice.

Ultimately, the state wants UBS to pay an administrative fine and return all investor funds.

How it Began

Auction-rate securities are municipal bonds, corporate bonds, and preferred stocks in which interest rates or dividend yields reset through auctions held every seven, 14, 28, or 35 days. For years, the auction market ran smoothly. From 1984 through 2006, there were only 13 auction failures.

In February, however, things began to change drastically, when Wall Street dealers, which conducted the auctions, stopped supporting the market with their own bids. As a result, auctions failed, leaving thousands of individual investors unable to access their money.

As weeks turned to months, investors became increasingly bitter about the frozen state of the auction market. Many claimed they were never informed by their broker about the potential risks that auction securities presented. A growing number of those complaints focused on UBS Financial Services, which prompted Massachusetts' securities regulator to begin an investigation last summer into how the firm marketed and sold auction-rate securities to investors.

On June 26, 2008, regulators apparently got their answer, and filed civil fraud charges against UBS for allegedly selling investments that the Swiss bank knew were not safe. In addition to the fraud and misconduct charges, the complaint alleges that UBS ramped up its sales campaign even as large corporate cash managers were shunning auction-rate securities and UBS' own inventory was ballooning.

“While UBS was aggressively selling ARS to its customers, UBS' man in charge of orchestrating the sales campaign was bailing out of his personal holdings in that investment as early as August of last year,” the complaint states.

This isn't the first legal trouble for UBS over auction-rate securities. In May, the company settled with the Massachusetts attorney general's office to return $37 million to the Massachusetts Turnpike Authority and 17 municipalities that invested in auction-rate securities after it agreed the securities weren’t permissible investments under their official investment mandates.

Meanwhile, individual investors continue to try and untangle themselves from the auction-rate securities ordeal. So far, a few firms are buying back the securities from clients. Other brokerage firms have allowed customers to “borrow” loans against their illiquid securities. A secondary market also has opened for trading, giving investors who are willing to take a loss on the principal of their investment one way to get back some of their money.

All of these options, however, have made investors increasingly weary of Wall Street, where lawsuits and arbitration claims grow by the day. The latest news of fraud and misconduct charges against UBS and its dealings with auction-rate securities is yet another example that corporate oversight, accountability and transparency are sorely missing when we need it most.


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