In addition to Citigroup and Merrill Lynch, UBS has come forth as the latest Wall Street investment bank to settle charges levied by state and federal regulators over the inappropriate sale of auction-rate securities. As part of the settlement, UBS agrees to repurchase nearly $19 billion - the largest amount to date - of the frozen securities from investors.
The agreement with UBS is between the Swiss-based firm, the Securities and Exchange Commission (SEC) and regulators in several states, including Massachusetts and New York. Starting Jan. 1, 2009, UBS will buy back $8.3 billion of auction securities from individual investors, as well as $10.3 billion from institutional clients beginning June 2010. In addition, the firm has agreed to help its institutional clients sell $10.3 billion in securities.
UBS also will pay a fine of $150 million, which is to be split between Massachusetts and New York, both of which accused UBS of misleading clients about the liquidity risks of auction-rate securities. Resolving its auction rate troubles will not come easy for UBS. Analysts say the firm potentially could be looking at up to nearly $2 billion in write-downs, which is on top of the $37 billion it already has taken.
Prior to the August 8, 2008 settlement, UBS had been facing a tsunami of civil charges from securities regulators in multiple states, all accusing UBS of using deceptive marketing practices to pitch auction rate securities to investors as the market neared collapse. Once the market actually did seize up in February, 2008 thousands of investors were left holding millions of dollars in illiquid securities – investments they had been sold as cash equivalents.
In July 2008, UBS reached a settlement with the attorney general of Massachusetts in which it agreed to buy back $37 million of auction rate securities sold to 18 Massachusetts cities and towns. One month later, the firm paid authorities in Massachusetts $1 million to resolve claims that it violated Massachusetts law by selling the securities to municipalities.
Despite the August 8, 2008 settlement with UBS, Attorney General Cuomo apparently is not ruling out additional charges against select individuals at the firm who are alleged to have orchestrated internal campaigns to sell auction rate securities to unsuspecting investors.
According to Cuomo’s complaint filed July 25, 2008 at least seven UBS executives sold $21 million of their personal holdings in auction rate securities while continuing to promote the instruments to individual investors. Among those executives is David Aufhauser, UBS’ general counsel, who quit the firm earlier this month. UBS’ move to settle its auction rate problems follows similar actions taken earlier by Citigroup, Inc. On August 7, 2008 the nation’s largest bank agreed to buy $7.3 billion of the securities from individual investors and pay a $100 million fine.
Merrill Lynch, which had been sued by Massachusetts Secretary of State William Galvin, followed Citigroup’s lead and is voluntarily buying back about $10 billion auction rate securities starting in January. Meanwhile, the unusual actions taken by Wall Street banks over the past several days to settle charges brought by state and federal regulators are being called unprecedented - and perhaps a strong indication that evidence of deception and fraud was indeed too extensive to deny.
Looking ahead, however, UBS could still face an uphill battle over auction rate securities. As reported August 8, 2008 on Bloomberg.com, one of the higher costs UBS must address is liquidating the auction securities sold by student loan companies. Less than $3 billion in student loan-backed auction debt has been refinanced, which is minuscule compared with municipal and closed-end funds.
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