labels: Bank general
New York attorney general charges UBS with securities fraud news
26 July 2008

UBS, the world's largest wealth manager, seems to have been caught on wrong side of the law. Leaving aside the massive $37-billion write-downs due to the sub-prime mortgage crisis and its aftermath, the Swiss major is facing a suit of legal suits in its largest market, the US.

After being accused of facilitating tax evasion for its American customers through the use of offshore tax havens – a charge which necessitated an appearance by UBS CFO Mark Branson before a Senate sub-committee where he declared the bank's decision to exit the offshore banking business for the country. (See: UBS exits offshore business in US)

UBS has now been sued by the attorney general of  New York who accused it of consumer and securities fraud on Thursday, saying the bank had misled investors when it sold them auction-rate securities.

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. But the $300-billion market for these instruments collapsed in February, trapping investors who had been told that they were safe and the instruments were easy to encash.

According to charges laid by the attorney general Andrew Cuomo, seven UBS bankers, who have not been named, sold their personal holdings in the three months leading up to the collapse of the auction-rate securities market because they knew it was heading for a crisis. However, at the same time, the bank continued to market and sell tens of billions of dollars of the securities to its clients.

"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 as the securities market started to collapse, leaving thousands of customers holding the bag," Cuomo said in a statement announcing the auction-rate litigation.

In a statement, UBS said that while some of its employees had exercised ''poor judgment'' and it was considering disciplinary action, none had broken the law. The bank said it was ''frustrating'' that the Attorney-General had brought the case while the bank was involved in negotiations to rescue the auction-rate securities market, which collapsed in February leaving investors with $37 billion of illiquid assets.

According to US media reports citing people familiar with the matter, UBS has suspended David Shulman, the firm's head of fixed income in the US and global head of municipal securities, who ran the auction-rate securities business at UBS.

Attorney general Cuomo's office is the third state authority to take UBS to task over the auction-rate market, after William F Galvin, the secretary of the Commonwealth of Massachusetts, and the Texas State Securities Board. However, this case could have greater impact because UBS's bond desk is based in New York, giving Cuomo the right to bring a case on behalf of UBS customers everywhere.

UBS can take solace from the fact that it may soon be joined by more of its peers. Lawyers specialising in white-collar crime said they expected to see many more cases filed in the coming months. Bank of America, Merrill Lynch and Wachovia have been named by other state regulators as targets in auction-rate investigations.

Cuomo said as much when he told reporters, ''UBS is not alone in this scheme. There are other institutions which participated, but UBS is a major player.''


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New York attorney general charges UBS with securities fraud