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Attorney General Andrew M. Cuomo today announced a multi-billion dollar securities fraud lawsuit against UBS Securities LLC and UBS Financial Services, Inc. (collectively “UBS”). The lawsuit charges UBS with falsely selling and marketing auction rate securities as safe, highly liquid, and cash-equivalent securities. However, the representations were deceptive as the auction rate securities market came under tremendous strain, leaving the securities with mounting liquidity risks that eventually blocked thousands of customers across New York and the nation from accessing their holdings.
Today, UBS customers are holding more than $25 billion in illiquid, long-term paper as a result of UBS’s fraudulent misrepresentations and illegal conduct.
Cuomo’s investigation into UBS also discovered that as the securities market started to collapse, the bank’s top executives quickly sold-off $21 million in personal holdings of auction rate securities, but continued to market the securities to its consumers. Internal UBS e-mails subpoenaed by Cuomo detail top executives’ efforts to sell-off personal holdings of auction rate securities.
“Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag,” said Attorney General Andrew Cuomo. “Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behavior will not be tolerated.”
UBS misrepresented the risks of auction rate securities to its retail clients and other customers. UBS Financial Advisors marketed auction rate securities to UBS customers as liquid, short-term investments that were similar to money market instruments with interest rates that would reset at periodic auctions based on the bids submitted by market participants. Customers then received account statements that identified auction rate securities as cash equivalent securities. UBS’s representations were false; in fact, UBS knew that the auction rate securities market was becoming increasingly strained and that UBS was considering various options with respect to auction rate securities, including letting auctions fail.
UBS’s fraudulent sales practices proved effective - UBS stood out as a market leader in auction rate securities sales. As of February 2008, UBS had more than 50,000 customer accounts holding auction rate securities, including over 7,000 New York customer accounts. On February 13, 2007, UBS stopped supporting its auctions, and UBS customers learned, much to their shock and dismay, that they could not get access to billions in what they believed was as liquid as cash.
In the final months of 2007 and in the early weeks of 2008, UBS’s management became increasingly concerned with the unsustainable growth in its holdings of auction rate securities and its need to support auctions in order to avoid auction failures. UBS created an auction rate securities working group specifically to address the floundering market. During this period, UBS also looked for ways to have its financial advisors sell auction rate securities and lessen the mounting pressure of UBS’s growing inventory. While many options were discussed, the only one that was repeatedly implemented was to re-double sales efforts to UBS clients.
Despite UBS’s aggressive marketing of auction rate securities to consumers, the bank’s top management continued to demonstrate serious concern over the health of the overall market. Furthermore, at least seven working group members sold a collective $21 million of their personal auction rate securities after the working group had been formed.
Attorney General Cuomo’s lawsuit seeks to require UBS to buy back auction rate securities from defrauded customers at par. It also seeks disgorgement of ill-gotten gains, restitution and other damages, and injunctions from further violations of New York’s Martin Act. The lawsuit was filed in the Supreme Court of New York, New York County.
This case is being handled by Assistant Attorneys General Pamela Lynam Mahon, Ethan Zlotchew, and Christopher Mulvihill, as well as Economist for the Division of Economic Justice Kitty Kay Chan, under the supervision of Investor Protection Bureau Chief David A. Markowitz and Executive Deputy Attorney General for Economic Justice Eric Corngold.
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