UBS Defrauded Investors, Cuomo Alleges in Lawsuit

By Christopher Twarowski
Washington Post Staff Writer
Friday, July 25, 2008

New York Attorney General Andrew M. Cuomo filed a securities fraud lawsuit yesterday against UBS, alleging that the Zurich investment bank marketed billions of dollars in unconventional bonds to investors around the country while improperly claiming they were as safe and liquid as cash.

The suit alleges that UBS defrauded more than 50,000 customers out of more than $20 billion by knowingly misrepresenting the investments, which are known as auction-rate securities, while several senior bank executives were selling off more than $21 million of their personal holdings in these bonds.

"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," Cuomo said in a statement.

Cuomo said he was seeking full reimbursement of the securities' value to investors. The complaint puts that total at more than $37 billion.

"Honor your contract," Cuomo said yesterday. "They want their money back."

UBS spokesperson Karina Byrne released a statement calling Cuomo's lawsuit "frustrating." The company said it had been in "good-faith negotiations" with the attorney general's office and had been conducting its own internal investigation into personal holdings sales by employees.

"We will vigorously defend ourselves against this complaint," the statement said. "UBS categorically rejects any claim that the firm engaged in a widespread campaign to move ARS inventory from the firm's own books and into private client accounts."

Auction-rate securities are variable-rate bonds that are put up for bid as often as once a week to determine their interest rate. Normally, the bidding process produces a lower rate than that of traditional bonds. But over the past few months, as the credit crisis spread across the financial system, bidders have been unwilling to buy these bonds except at high rates.

In February, as the credit crisis was getting worse, the $330 billion market for auction-rate securities froze up as the nation's largest firms declined to bid on them. This meant that investors could not take their money out or sell them.

At a news conference announcing the lawsuit, Eric Corngold, New York's executive deputy attorney general for economic justice, cited e-mails between senior UBS executives as "disturbing" evidence that UBS higher-ups knew the securities were illiquid and were actively trying to get rid of their own investments.

In one instance, the suit says, UBS's chief risk officer sent an e-mail to the firm's chief executive, who copied another executive, outlining "potential trouble" with the securities, dangers posed by the company's growing inventory of them and the potential damage to the firm's reputation if it didn't fulfill its obligations to investors.

According to the complaint, that second executive, dubbed "Executive A," then forwarded the e-mail to two other senior managers and, just 10 minutes later, wrote another e-mail to his personal financial adviser, stating, "I want to get out of arcs. Let's talk on Monday."

Another UBS executive acted similarly, unloading more than $6 million of his securities after learning of their problems, as did other company officials, according to the complaint. In all, the suit alleges that UBS officials sold more than $21 million in auction-rate securities from November 2007 to Feb. 12.

Cuomo said yesterday that his office was examining whether to take action against other investment firms.

Massachusetts Secretary of State William Galvin filed a suit against UBS last month, alleging similar fraudulent marketing practices. That case also focused on UBS's alleged conflict of interest as the lead bidder in its own auctions for the securities.

There is currently a task force of 12 state securities regulators investigating the marketing of auction-rate securities by some of the nation's largest firms, according to the North American Securities Administrators Association, an organization for state reg ulators.

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