New York sues UBS for fraud in auction-rate debt sales

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From Times staff writer Walter Hamilton:

The legal battle over the mess in so-called auction-rate debt escalated on Thursday, as a heavy hitter stepped into the fray.

New York Atty. Gen. Andrew Cuomo alleged in a suit that investment bank UBS pushed customers into auction-rate securities over the last year even though the market was crumbling and the firm’s own executives were dumping their holdings.

UBS and other brokerages pitched the securities as safe and easily redeemable, telling customers the investments were as liquid as money-market funds.

But UBS didn’t divulge that the company was scrambling to expunge the securities from its own books and that executives were cashing in $21 million of their own holdings, according to the civil suit filed in New York state court.

‘You can’t have two sets of rules,’ Cuomo said at a news conference. ‘You can’t have one set of rules for customers and another set of rules for executives and the corporation.’

Auction-rate securities are, in effect, long-term debt instruments that were marketed as short-term debt. The interest rates on the securities reset in auctions every seven to 35 days. Municipalities and closed-end mutual funds issued more than $300 billion of the debt in recent years because it was a relatively cheap way to borrow.

But the reset auctions ground to a halt in February as the credit crunch intensified and institutional investors refused to buy complex securities of any sort. That left many individual investors unable to sell their auction-rate holdings -- a big problem for anyone needing short-term cash for a mortgage payment or tuition bill.

About half of the market has since been restructured into fixed-rate debt -- meaning roughly one of every two investors can get their money back quickly, said Thomas Doe, president of Municipal Market Advisors, a Concord, Mass.-based muni-bond research firm. The rest still are stuck, unable to cash out.

UBS denied wrongdoing and said it didn’t try to fob off troubled securities onto customers.

‘It is frustrating that the New York Attorney General has filed this complaint while we have been fully engaged in good faith negotiations with his office to bring liquidity to our clients holding auction rate securities,’ the firm said in a statement.

It added that ‘while UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals and are evaluating appropriate disciplinary measures for these individuals.’

Other state attorneys general also have probes of the auction-rate market underway.

Help can’t come fast enough for investors who still are stranded in the securities.

Eric Handler, a 37-year-old Los Angeles resident, has the bulk of his life savings in auction-rate issues. His brokerage has repeatedly promised to free up his money, but it hasn’t happened yet.

‘I haven’t gotten a penny,’ Handler said. ‘With everything going on with the mortgage crisis, this one is just as big for a lot of people.’