UBS Agrees to Refund $18.6 Billion in Bonds
Investors Could Not Sell Securities

By Heather Landy
Special to The Washington Post
Saturday, August 9, 2008; D01

NEW YORK, Aug. 8 -- Swiss investment bank UBS on Friday became the latest financial firm to say it would buy back billions of dollars of bonds from customers who have been unable since February to cash in their investments, known as auction-rate securities.

Under a settlement with the Securities and Exchange Commission and state regulators including New York Attorney General Andrew M. Cuomo, UBS agreed to refund clients up to $18.6 billion, the biggest repurchase offer extended since authorities began investigating the auction-rate market meltdown.

Citigroup and Merrill Lynch announced similar steps Thursday.

While this would not be the first time that investors have been made whole by investment firms in the wake of a Wall Street scandal -- Prudential Securities in the mid-1990s had to refund investors stung by limited partnerships sold by the firm -- securities law experts said that the magnitude of the expected reimbursements for auction-rate securities holders is unprecedented.

UBS and Citigroup, the two largest dealers in the auction-rate securities market, will offer relief to a total of about 80,000 customers.

The auction-rate securities still bear interest and have value. Citigroup this week estimated that the auction-rate securities held by its clients are worth about 93 cents on the dollar. But the notes became nearly impossible for investors to unload starting in February, when the broader credit crisis led to widespread failures at the frequent auctions that would determine the securities' interest rates.

The auction failures attracted the attention of state and federal regulators, which accused UBS, Citigroup and other firms of fraudulently marketing auction-rate bonds to clients as safe, liquid investments.

Last month, UBS volunteered to help clients unwind their positions by letting them sell back more than $3 billion of auction-preferred stock, an equity instrument that pays dividends set at weekly or monthly auctions. But regulators sought a far more comprehensive relief plan from the firm.

"In a short time, approximately 31,300 individual, charitable and small business investor accounts will receive more than $8.2 billion in liquidity, and approximately 9,200 investor accounts holding tax-exempt auction preferred shares will receive nearly $3.3 billion in liquidity," said Linda Chatman Thomsen, director of the SEC's enforcement division. "UBS also will begin the process of restoring $10.3 billion in liquidity to approximately 1,000 institutional investor accounts."

The bank will work with retail customers first. Individuals and nonprofits with less than $1 million of assets with the bank will be able to swap out their auction-rate securities starting Oct. 31, while larger retail customers will be able to take advantage of the buyback offer beginning Jan. 1, UBS said.

UBS by mid-September will start offering retail clients no-interest loans equal to the amount of their auction-rate securities holdings, should customers need liquidity before the repurchases can be made.

Beginning in June 2010, UBS will agree to purchase auction-rate securities from institutional clients that want to trade them in.

UBS, which neither admitted nor denied wrongdoing, also will pay a $75 million fine to the state of New York and $75 million to other state regulatory agencies involved in the investigation.

Cuomo, who sued UBS last month, said he was glad a settlement was reached quickly. "Even though I'm a lawyer and we have an office of lawyers, litigation is the last resort," Cuomo said at a press conference here to announce the agreement. "We're trying to get people help right away. Litigation can take years."

Cuomo and other regulators involved in the UBS and Citigroup negotiations said they still plan to press ahead with investigations of other firms.

Meanwhile, House Financial Services Committee Chairman Barney Frank (D-Mass.) said the panel still plans to hold hearings next month on the auction-rate securities meltdown. "We're not a case-by-case adjudicator, and you don't want settlements like this to be made on a political basis," Frank said. "Our main job is to determine if there's any statutory or regulatory fix to keep it from happening again."

News researcher Madonna Lebling contributed to this article.