NEW YORK (AFP) — New York state officials Thursday filed civil fraud charges against UBS, accusing the Swiss banking giant of marketing certain kinds of adjustable bonds as "safe" investments.
State Attorney General Andrew Cuomo said the suit accuses UBS Securities LLC and UBS Financial Services "with falsely selling and marketing auction-rate securities as safe, highly liquid, and cash-equivalent securities."
Cuomo said UBS customers "are holding more than 25 billion dollars in illiquid, long-term paper as a result of UBS's fraudulent misrepresentations and illegal conduct."
According to the suit, UBS had advised clients that auction-rate securities, which are bonds in which the rate is set by auction, were similar to cash, just before the market for the instruments began to collapse last year.
"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," a statement from Cuomo's office said.
The investigation into UBS also discovered that as the securities market started to collapse, the bank's top executives quickly sold off 21 million dollars in personal holdings even as the bank continued to market the securities to its consumers.
"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," Cuomo said.
"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 said in a statement it had not seen the Cuomo lawsuit but noted that it was "frustrating" to see the legal action "while we have been fully engaged in good-faith negotiations with his office to bring liquidity to our clients holding auction-rate securities."
"As (Cuomo) is fully aware, UBS conducted our own internal investigation with the assistance of external counsel on sales of personal holdings of (auction-rate securities), the statement said.
"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."
The market for auction-rate securities, which often include bonds from local governments, began to freeze up as a result of the credit crunch in global financial markets.
According to Cuomo, UBS marketed auction-rate securities "as liquid, short-term investments that were similar to money market instruments" and account statements identified the securities as cash equivalents.
"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," the attorney general's office said.
In February 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," according to the statement.
In February 2008, UBS had more than 50,000 customer accounts holding auction-rate securities, including over 7,000 from New York state, according to Cuomo's office.
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