UBS recently agreed to buy back $18.6B in auction rate securities (ARS) and pay $150M in penalties ($75M to the State of New York, and $75M to the North American Securities Administrators Association) to settle allegations made by the New York Attorney General and the Securities and Exchange Commission that UBS fraudulently marketed the safety of ARS to customers.
On July 24, 2008, the New York Attorney General filed suit against UBS for fraud and false disclosure in connection with its underwriting, distribution and sale of ARS. The NYAG’s complaint alleged that UBS not only failed to disclose the full risks of investment in ARS, but also purposefully sold ARS to retail customers in an effort to reduce its own exposure when it recognized the market would likely collapse. The complaint contained counts for “Persistent Fraud or Illegality” and for “Securities Fraud” violations (all under state statutes), and sought disgorgement, restitution, and damages for UBS’s conduct. For further discussion of the suit, please click here.
According to the New York Attorney General’s press release, the settlement requires UBS to buy back illiquid ARS from “retail customers, charities, and small to mid-sized businesses” by January 2, 2009. In addition, UBS is required to reimburse retail investors who sold their ARS at a loss and to consent to a public arbitration to resolve consequential damages claims resulting from retail investors not being able to liquidate their ARS. Please click here for the New York Attorney General press release; here for the SEC press release, and here for the UBS press release.