New York State sued UBS AG on Thursday, accusing the Swiss bank of committing a "multi-billion dollar fraud" by steering broker clients into auction-rate securities that became impossible to sell once the credit market tightened. The lawsuit, filed by New York State Attorney General Andrew Cuomo, accuses UBS of deceptively selling auction-rate securities as cash equivalents.
These long-term securities are issued by municipalities, student-loan companies and mutual funds, and interest rates are set through weekly or monthly auctions. The lawsuit said that at least seven UBS executives dumped $21 million in auction-rate securities that they held in personal accounts as the credit market began showing signs of trouble, and that the bank continued to sell those securities.
UBS "continued the fraud after they knew the fraud was revealed for what it was," Cuomo said at a news conference. "Top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag." Cuomo said that in February more than 50,000 UBS customers across the United States held more than $25 billion in the illiquid securities.
The Attorney General's office did not sue individuals, but Cuomo said the investigation was continuing. UBS said it would 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," the bank said. UBS said it conducted an internal probe of 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 judgement by certain individuals and are evaluating appropriate disciplinary measures," the bank said.