New Hampshire Sues UBS Over Student Loan Auction Rate Fraud
UBS continues to find itself in hot water over auction rate securities. Less than a week after the Swiss-based bank agreed to settle charges by New York Attorney General Andrew Cuomo of auction rate fraud and buy back nearly $20 billion of the securities, UBS is now being sued by New Hampshire securities regulators.
In the first legal action of its kind, the state accuses UBS of hatching an elaborate plan to unload its own inventory of auction rate securities by urging the New Hampshire Higher Education Loan Corp (NHHELCO) to increase the monthly interest rates the loan corporation pays - in some cases to nearly 18% from about 3.4%.
NHHELCO says that following UBS’ advice and raising interest rates to entice more investors winded up costing an additional $25.5 million, forcing the state’s leading issuer of student loans to suspend two loan programs: the alternative student loan program and the federal consolidation loan program.
Reportedly, student loan officials in Vermont and Illinois also believe that UBS used similar tactics to persuade them to temporarily raise interest rates as a way to bring in more investors. To date, neither of those two states has filed related complaints on the issue.
Student loan entities like NHHELCO are major issuers of auction rate securities. In February, investment banks abruptly pulled out of the auction rate market, no longer willing to use their own capital to buy auction rate securities. As a result, many nonprofit student loan lenders have billions of dollars of illiquid auction rate securities outstanding that were underwritten and remarketed by investments banks like UBS and other firms.
As with other state and federal investigations into the role Wall Street firms may have played in the auction rate market’s collapse and their dealings with investors, emails are a central factor in the New Hampshire charges. Specifically, the emails contend that UBS steered NHHELCO into auction rate securities at a time when it knew the market was headed for collapse and the bank’s own auction rate inventory piling up.In one email to colleagues, Ross Jackman, an UBS official, said the following: “Clearly, student loans are the problem pushing us over inventory limits.â€
NHHELCO’s complaint is the first legal action to focus on the plight of issuers of auction rate securities.
UBS has 11-year relationship with NHHELCO, underwriting $1.5 billion in auction rate securities.
In the 42-page complaint filed August 14, NHHELCO says UBS’ actions ultimately prevented the New Hampshire lender from raising $70 million to fund 6,500 loans for students. This means many students heading back to college this month - particularly those needing last-minute financing - will find fewer loan options available to them. Meanwhile, NHHELCO is still paying UBS $2.5 million a year in broker fees.
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September 15th, 2008 at 6:00 pm
what would it take for people such as the man discussed here (and any other small investor that has been at it any length of time) to be treated fairly? this is one instance, although somewhat unique because he was also tricked by the government explicitly, of rampant lies by corporate leaders. remember allaire corporation? the day before the stock went into the ocean, the allaire’s were soothing investors, saying nothing was wrong. i believed them and promptly donated 20k; thank goodness i received a $240 check 4-5 years later from the law firm! that’s justice. look at leh, bear stearns, etc. they are all crooks and investing has become tantamount to figuring out how they will deceive. disappointing to say the least that no one can be trusted.