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New York Sues UBS for Fraud

Attorney General claims that firm sold junk investments

July 25, 2008
The State of New York has leveled fraud charges against a major securities firm, UBS.

Attorney General Andrew M. Cuomo has filed a multi-billion dollar securities fraud lawsuit against the firm, charging it with falsely selling and marketing auction rate securities as safe, highly liquid, and cash-equivalent securities.

Cuomo said the claims were deceptive. As the auction rate securities market came under tremendous strain, it left the securities with mounting liquidity risks that eventually blocked thousands of customers across New York and the nation from accessing their holdings, he said.

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, the attorney general said.

Cuomo said his investigation into UBS also discovered that as the securities market started to collapse, the bank's top executives quickly sold off $21 million in personal holdings of auction rate securities, but continued to market the securities to its consumers. Internal UBS e-mails subpoenaed by Cuomo detail top executives' efforts to sell-off personal holdings of auction rate securities.

"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 the securities market started to collapse, leaving thousands of customers holding the bag," Cuomo said. "Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behavior will not be tolerated."

The suit charges UBS misrepresented the risks of auction rate securities to its retail clients and other customers. UBS Financial Advisors marketed auction rate securities to UBS customers as liquid, short-term investments that were similar to money market instruments with interest rates that would reset at periodic auctions based on the bids submitted by market participants. Customers then received account statements that identified auction rate securities as cash equivalent securities.

But Cuomo says UBS's representations were false. Cuomo said that UBS knew that the auction rate securities market was becoming increasingly strained and that UBS was considering various options with respect to auction rate securities, including letting auctions fail.

The suit maintains that UBS's fraudulent sales practices proved effective. The company stood out as a market leader in auction rate securities sales. As of February 2008, UBS had more than 50,000 customer accounts holding auction rate securities, including over 7,000 New York customer accounts.

On February 13, 2007, UBS stopped supporting its auctions, and UBS customers learned, much to their shock and dismay, that they could not get access to billions in what they believed was as liquid as cash.

In the final months of 2007 and in the early weeks of 2008, the suit alleges, UBS's management became increasingly concerned with the unsustainable growth in its holdings of auction rate securities and its need to support auctions in order to avoid auction failures. UBS created an auction rate securities working group specifically to address the floundering market.

During this period, UBS also looked for ways to have its financial advisors sell auction rate securities and lessen the mounting pressure of UBS's growing inventory. While many options were discussed, the only one that was repeatedly implemented, Cuomo says, was to re-double sales efforts to UBS clients.

Cuomo's lawsuit seeks to require UBS to buy back auction rate securities from defrauded customers at par. It also seeks forfeit of ill-gotten gains, restitution and other damages, and injunctions from further violations of New York's Martin Act. The lawsuit was filed in the Supreme Court of New York, New York County.

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