| NEW YORK
NEW YORK Feb 12 UBS AG has
lost a bid to block a securities arbitration by a Minnesota
healthcare organization asserting claims arising out of $125
million in auction-rate securities it issued in 2007.
The ruling by U.S. District Judge Michael Davis in
Minneapolis on Monday marked the latest decision in a series of
disputes over who constitutes a "customer" for securities
arbitration before the Financial Industry Regulatory Authority.
Davis found Allina Health System was a customer, despite the
bank's arguments that auction-rate securities issuers are not
customers of underwriters under the rules of FINRA, the
financial industry's self-regulator that runs the arbitration
forum to settle disputes between broker dealers and customers.
Auction-rate securities are a type of bond in which
investors place bids that determine interest rates.
A spokeswoman for UBS did not respond to a request for
Allina, a not-for-profit health-care system, commenced the
arbitration in February 2012, in a case arising out of
auction-rate securities it issued in October 2007 as part of an
issuance of $475 million in bonds to refinance debt and to
finance remodeling and renovations.
UBS was the underwriter of the auction-rate securities
issued by Allina.
In February 2008, as the financial crisis gained steam, the
auction-rate securities market collapsed as auctions failed.
Allina contended the market collapsed due to a decision by UBS
and other banks to stop submitting support bids to prevent
Allina said that as a result, it was forced to incur
considerable costs refinancing the securities in June 2008. It
also lost bond insurance, resulting in higher payments on the
bonds, it said.
In its statement of claim with FINRA, Allina contended that
UBS misrepresented the risks of the auction-rate market and
accused it of breaching its fiduciary duties and violating
federal and state securities laws.
UBS denied the allegations. In August, it filed the federal
In a 19-page decision Monday, Davis pointed to a series of
decisions in similar cases denying banks' claims that a
plaintiff was not a customer under FINRA rules.
Most recently, the 4th U.S. Circuit Court of Appeals last
month allowed Roanoke, Virginia-based Carilion Clinic to move
forward with an arbitration against UBS and Citigroup Inc
over $234 million in auction rate securities.
"The Court finds these decisions persuasive and consistent
with its finding that Allina is UBS's customer," Davis wrote.
The judge also rejected UBS's contention that its agreements
with Allina required any disputes to be filed either with the
American Arbitration Association or in courts in New York.
"Obviously I'm just as pleased as whenever we win one of
these," said James Swanson, a lawyer for Allina who has been
involved in most of the other recent court challenges involving
auction-rate securities issuers pursuing FINRA claims.
To date, he said, no court in these cases has ruled that
auction-rate securities issuers are not FINRA customers.
But on the question of forum-selection clauses, his firm
suffered a rare set back last week.
U.S. District Judge Richard Sullivan on Friday enjoined an
arbitration against Goldman Sachs Group Inc by Golden
Empire Schools Financing Authority and Kern High School District
in California over $125 million in auction-rate securities.
The judge found their agreements required disputes to be
brought in New York federal court. Swanson, who said he expects
to appeal, said "it seems like that's probably where the fights
are going to shift next."
The case is UBS Securities LLC v. Allina Health System, U.S.
District Court, District of Minnesota, 12-02090.