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US: Massachusetts Charges UBS
In Auction-Rate Investigation

Charges Are Among the First to Result
From Turmoil in Market for the Securities

by DONNA KARDOSThe Wall Street Journal
June 26th, 2008

Marking one of the first sets of government-fraud charges filed since the market for auction-rate securities froze up earlier this year, regulators in Massachusetts charged UBS AG's UBS Securities LLC and UBS Financial Services Inc. with fraud and dishonest conduct in their sales of the securities

Under the charges, the Massachusetts Secretary of the Commonwealth William Galvin alleges that UBS representatives told investors that auction-rate securities "were safe, liquid 'cash alternatives' when UBS knew they were not."

The securities division of Mr. Galvin's office is now seeking to order UBS to return to investors the money they invested in auction-rate securities at par "and make restitition to those investors who have had to sell at below par."

"We are disappointed that the Massachusetts Securities Division has filed this complaint against us, as we, our peers and the industry work toward solutions," said UBS spokeswoman Karina Byrne in a statement. She also noted that UBS provided support to the market longer than other firms and held approximately $10 billion of the securities on its own books at the end of the first quarter. She noted the firm offers its clients loans with uniquely low rates to make up for the illiquidity in the market.

"We will defend the specific allegations of the complaint," Ms. Byrne said. "Contrary to the allegations, UBS is committed to serving the best interests of our clients."

For decades, individuals and companies bought auction-rate debt from municipalities, charitable organizations, student lenders and closed-end mutual funds. The securities had long-term maturities but functioned like a short-term investment, paying interest rates that were reset in weekly or monthly auctions conducted by Wall Street firms.

But money invested in auction-rate securities has been all but frozen since regularly scheduled auctions broke down in February as flustered investors fled complicated financial assets.

The complaint from Mr. Galvin charges that UBS "stepped up its sales campaign to investors even as, and because, large corporate cash managers were shunning auction rate securities and its own inventory was ballooning."

It goes on to say that while UBS was aggressively selling auction-rate securities, the leader of the auction-rate-securities sales campaign, David Shulman, was bailing out of his personal holdings in that investment as early as last August. By Dec. 12, Shulman was entirely out of holding auction-rate securities.

"The game was fixed; only the customers were in the dark," Mr. Galvin said in a statement.

UBS also faces charges from Massachusetts of records violations for "inexcusable delays in providing basic business records" related to its auction practice.

In addition to seeking restitution for investors, Mr. Galvin is also trying to order UBS to cease and desist "from further violations of the Massachusetts Uniform Securities Act," and to be censured. In addition, UBS could face an administrative fine.

The complaint notes that investors were not told that in many auctions the interest rate was no actually set through the auction process, but was "actively managed" by UBS "so that they would be just high enough to move the auction rate securities it had underwritten but not so high as to make the issuers that were its underwriting clients unhappy."

It also calls the auction-rate securities sales "the cornerstone of UBS' inventory-reduction program," and says investors were not made aware of it.

Write to Donna Kardos at

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