UBS pays Massachusetts $1 mln to end probe

NEW YORK (Reuters) - UBS AG (UBSN.VX) will pay Massachusetts $1 million as part of its agreement to settle the state's probe into the investment bank's inappropriate sale of auction-rate securities to 17 cities and towns.

UBS will also repurchase $3.4 million of auction-rate securities sold to the municipalities, according to a statement from Massachusetts Attorney General Martha Coakley issued on Wednesday.

UBS is paying $750,000 to the state to cover fees and expenses and $250,000 to provide support to cities and towns impacted by the breakdown of the auction rate markets.

Under a preliminary May agreement, UBS agreed to repurchase $35 million of the securities, which have been impossible to sell since credit markets froze up in January.

Coakley's office began investigating allegations in February that UBS misled government entities regarding whether the auction-rate securities were a permissible investment for them under state law.

"Our primary interest was to promptly return to these towns and cities the investment monies they placed with UBS," Coakley said in a statement. "However, another important goal was to find a way to prevent this from happening to towns and cities in the future."

A UBS spokeswoman said "Today's news represents the final step in the resolution of this matter."

The bank denied any wrongdoing in agreement.

New York and Texas were also investigating UBS for its role in managing markets for auction rate securities -- long-term debt with interest rates that reset weekly or monthly through auctions.

These investments, which offered higher yields than money markets, and were marketed to investors as the equivalent of cash, now cannot be sold. Issuers, including towns and government agencies, suddenly were forced to pay higher rates.

Investors meanwhile are stuck with debt that cannot be easily liquidated.