Auction Rate Securities: UBS Commits "Flagrant Breach of Trust"

New York, NYIf you needed any further proof that companies have been up to illegal activity regarding auction rate securities, this should finally convince you. New York State has filed a lawsuit against Swiss bank UBS AG, accusing the company of misleading clients by falsely selling auction rate securities as cash equivalents. According to the lawsuit, several UBS executives sold $21 million worth of auction rate securities as they discovered the securities market was in trouble; however, UBS continued to sell the securities to clients.

A press release issued by New York Attorney General Andrew Cuomo states, "Today, UBS customers are holding more than $25 billion in illiquid, long-term paper as a result of UBS's fraudulent misrepresentations and illegal conduct….Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon as the securities market started to collapse, leaving thousands of customers holding the bag."

UBS is accused of misrepresenting the risks of auction rate securities to its clients and customers by marketing them as liquid, short term investments. New York's lawsuit aims to make UBS buy back auction rate securities from customers at face value and pay restitution and other damages.

In announcing the lawsuit, Cuomo noted that UBS was not the only financial institution involved in the fraud. The state is investigating how numerous brokerages handled the auction rate securities market, sending subpoenas to 18 brokers and banks. Other financial institutions could face similar charges as more information comes to light.

Auction rate securities are issued by municipalities, student-loan companies, mutual funds and financial institutions. They allow the issuers to borrow money long term but at lower interest rates, which are set through regular auctions. However, the market for auction rate securities, which were marketed as liquid, turned sour when investors stopped buying the securities. Eventually, the so-called "cash-equivalent" securities were impossible to liquidate.

New York is not the first state to take legal action against UBS. Massachusetts and Texas have taken their own action, alleging the company sold auction rate securities despite evidence that they were risky. In fact, in December 2007, an email from UBS's chief risk officer to UBS's CEO discussed concerns about the auction rate market.


UBS is defending itself by saying that it does not believe its officials are guilty of illegal conduct. The company has also announced a plan to buy back up to $3.5 billion in auction rate securities from its customers; a move Cuomo said was not sufficient.

Meanwhile, 10 state securities regulators visited the head office of Wachovia Securities to demand that the company turn over documents regarding the company's sales and marketing practices. The regulators also conducted interviews with company representatives about Wachovia's auction rate securities business. The visit was prompted when Wachovia Securities failed to comply with requests for records and information from the Missouri Securities Division.

So far, Wachovia has not been charged with any criminal activity; however the company does face arbitration claims and a lawsuit alleging it omitted material information regarding auction rate securities.

If you invested in auction rate securities and were misled as to their liquidity, you are urged to contact a lawyer to file an arbitration claim.