Union Bank of Switzerland Formally Charged with Fraud by State of Massachusetts

AP
Mass. regulators file fraud charges against UBS
Thursday June 26, 1:50 pm ET
By Jay Lindsay, Associated Press Writer
Mass. regulators accuse UBS of fraud in sales of risky auction-rate securities

BOSTON (AP) -- Massachusetts regulators filed civil fraud charges Thursday against UBS Financial Services for allegedly selling investments it knew were extremely risky, but portrayed as safe.

The complaint by the Massachusetts Securities Division alleges that the financial services arm of the Swiss bank UBS AG knowingly let brokers present its auction-rate securities as virtually risk-free so it could reduce its own stake in the failing program.

The investments have their interest rates set at periodic auctions, depending on the submitted bids.

When the program ultimately failed, investors -- many of them retirees or small business owners -- were left with securities they can't sell, the complaint said.

"These customers have now discovered ... that they have been blindsided by the very people who were supposed to have their best interests at heart," the complaint said.

UBS spokeswoman Karina Byrne said the company was disappointed state regulators filed the complaint while the company was working to solve the problems caused by the auction rate market failure.

In a statement, she said the company supported the market longer than any other firm, and have offered loans at favorable rates to clients with holdings in it. "Contrary to the allegations, UBS is committed to serving the best interests of our clients," she said.

Auction rate securities were once considered safe, and were purchased by investors who wanted a place to park their money where it could be easily accessed.

But starting in February, weekly and monthly auctions at which investors normally purchase such the securities failed to yield buyers, as investors sought to avoid risk amid turmoil in credit markets.

The complaint alleges that even though executives were calling the program an "albatross" and knew it was near collapse early this year, it continued to sell the securities to individual investors. It presented them as a good value, in order to reduce its own inventory, the complaint says.

The complaint also alleges investors were never told the auctions weren't true auctions, and that UBS stepped in when buyers abandoned the program to underwrite the products and set the interest rate so the program wouldn't fail.

The state wants to force UBS to return all investor funds and pay a fine. The amount of money being sought was not disclosed in the complaint.

Last month, UBS agreed to buy back $37 million worth of these securities sold to 17 Massachusetts towns and cities and to the Massachusetts Turnpike Authority, under an agreement with Attorney General Martha Coakley.