Massachusetts accuses two UBS units of fraud

A Massachusetts securities regulator today sued two units of UBS AG, charging that employees of the Zurich, Switzerland bank committed fraud and dishonest conduct in sales of auction rate securities.
The charges, which were levied by William Gavin, the state’s secretary of the commonwealth, alleged that representatives from UBS Securities LLC and UBS Financial Services Inc., both of New York, told investors that ARS were “liquid, safe, money-market instruments,” but didn’t disclose to customers that “no true auctions existed for many of the securities,” according to the complaint.
The complaint accused the two units of aggressively selling the investment vehicles to clients without informing them that the bank had planned to pull out of auctions used to set the interest rates on the securities. Meanwhile, a top UBS executive sold off the securities from his own personal holdings.
Despite the concern, brokers still sold the securities from inventory and told clients that ARS were safe investments.
In February, UBS stopped supporting its ARS, leaving hundreds of customers stuck with the illiquid investment vehicles.
The state wants to force UBS to return all investor funds and pay an undisclosed fine. The amount of money that was lost was not disclosed in the complaint.
“We are disappointed that the Massachusetts securities division has filed this complaint against us, as we, our peers, and the industry work toward solutions,” UBS spokeswoman Karina Byrne wrote in an e-mail statement.
Ms. Byrne noted that UBS held approximately $10 billion worth of ARS at the end of first quarter. She wrote that UBS has offered its clients loans of up to 100% of the par value of their ARS holdings at preferred lending rates.
“We will defend the specific allegations of the complaint,” Ms. Byrne wrote. “Contrary to the allegations, UBS is committed to serving the best interests of our clients.”