Cuomo Readies UBS Civil Suit

Discussion in 'Wall St. News' started by Xuanxue, Jul 25, 2008.

  1. Xuanxue


    Cuomo Readies UBS Civil Suit

    July 23, 2008; Page C3

    New York state Attorney General Andrew Cuomo is making preparations to file civil securities-fraud charges against UBS AG, possibly as early as this week -- the first of several cases that could grow out of New York's investigations into the auction-rate-securities market and another blow for the industry and UBS.

    State securities regulators in Massachusetts have already filed charges against UBS. Mr. Cuomo's office could file charges against other entities it is investigating in coming weeks, say people familiar with the investigation.

    The lawsuit also could include allegations of malfeasance by senior UBS executives, say people familiar with the investigation. It wasn't clear which individuals would be named or whether charges against individuals would be filed.

    "A filing of a complaint at this point would be disappointing, given that we are working with regulators, peers, and industry groups to develop solutions addressing the liquidity issues in the ARS market," said Karina Byrne, a spokeswoman for UBS.

    In their June case, Massachusetts regulators named individuals in their complaint but didn't file charges against anyone, just against the firm itself.

    Because UBS's trading operations for auction-rate securities are based in New York, the Cuomo lawsuit could seek a broad resolution for UBS auction-rate clients nationwide. That could entail a settlement that would let customers cash in at face value securities that for months have been illiquid.

    UBS clients hold roughly $25 billion worth of these instruments.

    The investigation -- like hundreds of arbitration claims, several class-action lawsuits and federal and state investigations into these securities -- is focused on whether Wall Street firms adequately disclosed to investors the risk that these investments could become illiquid, say people familiar with it.

    Thousands of investors have said they believed they were buying securities that were tantamount to cash and just slightly higher-yielding than money-market funds.

    The $330 billion market for auction-rate securities allowed municipalities, charitable institutions, student-loan companies and mutual-fund companies to borrow money for long periods of time at short-term interest rates through auctions that reset the interest rate every week or month. In February, the market froze when several Wall Street auction houses backed away from supporting it with their own bids.

    Mr. Cuomo launched his investigation into the market in April, subpoenaing 18 institutions. The probe expanded this summer to consider potential liability by individuals at UBS and a wider array of financial institutions, say people familiar with the investigation.

    The New York attorney general's office has now subpoenaed 30 entities and 100 individuals, seeking information about the sales of auction-rate securities. Among those subpoenaed are Citigroup Inc., Merrill Lynch & Co., J.P. Morgan Chase & Co. and Goldman Sachs Group, Inc., and high-ranking executives at various firms as well as heads of municipal-bond desks, risk managers, financial advisors and others.

    The charges would follow actions taken by Missouri securities regulators last week to demand documents and interviews at Wachovia Corp. brokerage offices in St. Louis. Missouri Secretary of State Robin Carnahan said state regulators escalated their investigation into Wachovia in part because the firm was slow to respond to information requests.

    UBS last week responded to pressure from regulators and investors to buy back at face value some auction-rate securities held by investors. The firm announced a plan to repurchase up to $3.5 billion of tax-exempt auction-rate securities from clients, package them and sell new debt backed by those securities to money-market funds.

    The firm also settled in May with the Massachusetts attorney general's office to return $37 million to the Massachusetts Turnpike Authority and 17 municipalities that invested in auction-rate securities after UBS agreed they were not permissible investments under the municipalities' official investment mandates.