New York State sues UBS, alleges auction-rate fraud

NEW YORK (Reuters) - New York Attorney General Andrew Cuomo filed a civil lawsuit on Thursday against UBS AG, accusing the Swiss bank of deceptively steering customers into auction-rate securities that this year became impossible to sell amid the credit crunch.

The suit, filed in New York state court, accuses UBS of deceptively selling auction-rate securities to customers as cash equivalents. Cuomo also accused unidentified senior executives of wrongdoing, citing subpoenaed e-mails that he said detailed how they dumped $21 million in personal holdings as the auction-rate market collapsed and while the bank still sold the securities to customers.

UBS "continued the fraud after they knew the fraud was revealed for what it was," Cuomo said at a news conference. "After the auctions were failing, they continued to sell the auction-rate securities."

Cuomo said that UBS customers across the United States are holding more than $25 billion in the now-illiquid, long-term paper as a result of the alleged fraud. As of February, UBS had more than 50,000 U.S. customer accounts holding these securities, including more than 7,000 New York accounts.

UBS said in a statement that it would "vigorously 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 with his office to bring liquidity to our clients holding auction rate securities," the bank said.

UBS said it conducted an internal probe on 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 for these individuals," it said.

NATIONWIDE SWEEP

The lawsuit is expected to be the first in a series of cases to arise from the state's investigation into Wall Street's handling of the $330 billion auction-rate securities market.

New York also follows legal actions by Massachusetts and Texas that contend UBS continued to sell these instruments as safe when they knew they were potentially very risky.

"UBS is not alone in this scheme, there are other institutions which participated, but UBS is a major player," he said.

The short-term investments, long touted as being as liquid as cash, have been nearly impossible to liquidate after brokers stopped supporting the market in late January.

Cuomo's office wants to force UBS to buy back auction rate securities from defrauded customers at face value, disgorgement of any ill-gotten gains, restitution and other damages. Cuomo declined to estimate the extent of these damages.

In late 2007 and early 2008, according to the suit, UBS management became increasingly concerned about its auction-rate holdings and formed a working group to address the issue. At least seven working group members sold a collective $21 million of their personal auction-rate securities after the working group had been formed, the suit contends.

During this period, according to the suit, UBS looked for ways to have financial advisers sell auction rate securities and help pare down its own growing auction-rate inventory. Many options were discussed, but one repeatedly implemented was to encourage more sales to UBS clients, Cuomo's office said.

UBS "categorically rejects" any claim that the firm engaged in a widespread campaign to move auction-rate inventory from the firm's own books and into private client accounts.

The bank said its records show that UBS built up its own inventory of the securities from $5.9 billion at the end of 2007 to about $11 billion at the end of this year's first quarter, while its U.S. wealth management clients "were reducing their positions."

"It is well known that UBS continued to support the auctions longer than any other major firm," UBS said. UBS "has dedicated significant resources and substantial effort to find solutions for its clients."

UBS last week announced a plan to buy back as much as $3.5 billion in auction-rate securities from customers.

UBS' New York-listed shares were down more than 5 percent at $21.39 in early afternoon trade.

(Additional reporting by Martha Graybow)

(Writing by Martha Graybow; editing by Phil Berlowitz)