Prosecutors ramp up auction-rate probes: report

NEW YORK (Reuters) - U.S. prosecutors are stepping up criminal investigations into possible wrongdoing in the failed auction-rate securities market, the Wall Street Journal reported on Thursday.

One investigation is examining whether Lehman Brothers Holdings Inc (LEHMQ.PK) defrauded clients, and another is probing possible insider trading by a former executive at Swiss bank UBS AG (UBSN.VX), the newspaper said, citing several unidentified people familiar with the matter.

A Lehman spokesman, Hugh Burns, declined to comment, as did a spokesman for the U.S. Attorney's Office in Brooklyn.

Auction-rate securities were billed as safe, cash-like instruments bought and sold in periodic auctions, but big banks stopped supporting the auctions in January as investor demand for the debt dried up.

Many investors have been stuck holding the debt, sparking investigations into whether banks sold the securities even as they privately worried market turmoil was making it harder to complete auctions.

The newspaper said federal prosecutors in Brooklyn, New York, were investigating whether individuals at Lehman defrauded customers by dumping auction-rate securities into their accounts before the market broke down.

The newspaper said the U.S. Justice Department in Washington also was weighing whether to bring insider trading charges against ex-UBS executive David Shulman for selling his own holdings of auction-rate securities ahead of the market's collapse, according to two people familiar with the matter.

Shulman ran the auction-rate securities business for UBS. A lawyer for Shulman, Robert Anello, declined to comment.

UBS spokeswoman Rohini Pragasam said Shulman left the firm in August but declined further comment, saying it does not discuss matters between the Justice Department and individuals. A Justice Department spokeswoman declined to comment.

(Reporting by Martha Graybow, editing by Maureen Bavdek/Jeffrey Benkoe)