New York sues UBS, alleges auction-rate fraud

By Joseph A. Giannone

NEW YORK (Reuters) - New York State sued UBS AG on Thursday, accusing the Swiss bank of committing a "multi-billion dollar fraud" by steering broker clients into auction-rate securities that became impossible to sell once the credit market tightened.

The lawsuit, filed by New York State Attorney General Andrew Cuomo, accuses UBS of deceptively selling auction-rate securities as cash equivalents.

These long-term securities are issued by municipalities, student-loan companies and mutual funds, and interest rates are set through weekly or monthly auctions.

The lawsuit said that at least seven UBS executives dumped $21 million in auction-rate securities that they held in personal accounts as the credit market began showing signs of trouble, and that the bank continued to sell those securities.

UBS "continued the fraud after they knew the fraud was revealed for what it was," Cuomo said at a news conference. "Top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag."

Cuomo said that in February more than 50,000 UBS customers across the United States held more than $25 billion in the illiquid securities. The Attorney General's office did not sue individuals, but Cuomo said the investigation was continuing.

UBS said it would defend itself against the charges.

"It is frustrating that the New York Attorney General has filed this complaint while we have been fully engaged in good faith negotiations," the bank said.

UBS said it conducted an internal probe of alleged sales of personal holdings of auction-rate debt by its executives.

"While UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals and are evaluating appropriate disciplinary measures," the bank said.

NATIONWIDE SWEEP

The lawsuit is the first to arise from the state's investigation into how brokerages handled the $330 billion auction-rate market. In April, Cuomo sent subpoenas to 18 brokers and banks.

These securities were popular among investors because they offered higher yields than money-market funds and were seen as equally liquid.

The market for auction-rate securities froze when investors, spooked by the tightening credit market, stopped buying them. Wall Street firms, which long provided liquidity, were overwhelmed by selling and one by one they stopped propping up the market with their own bids.

By late January auctions began to fall apart, and suddenly securities promoted as cash-equivalents became impossible to liquidate. At the same time, issuers such as New York's Port Authority were forced to pay higher rates.