Suit Claims UBS Misled Investors

The top securities regulator in Massachusetts has sued UBS on the grounds of fraud, saying that the firm misled clients when it sold them auction-rate securities and that it pushed the increasingly risky instruments on individual investors to reduce its own potential losses.

The roughly $300 billion market for auction-rate securities ground to a halt last February when buyers all but vanished. Existing holders were locked into shares and notes issued by municipalities, tax-exempt institutions, student loan companies and closed-end funds. Many of these investors say they were told that the securities were as safe and liquid as cash and had no idea that their holdings could be tied up indefinitely.

In the complaint, William F. Galvin, secretary of the Commonwealth of Massachusetts, cited numerous and sometimes urgent e-mail messages indicating that as early as last August UBS executives knew the market was imperiled. As sellers began to outnumber buyers, the messages show, UBS executives urged the sales force to promote the notes and shares as aggressively and widely as possible.

“The thing that is most amazing to me is what a comprehensive and deliberate strategy this was by UBS,” Mr. Galvin said. “They wanted to reduce their inventory, so they decided to gear up their sales campaign using cashlike arguments deliberately.”

NY Times