Corporate & Securities Law

New York Attorney General Cuomo?s complaint against UBS is the second of two (so far) bazooka blasts destroying whatever credibility UBS has left among its retail and institutional customers, its own financial advisers, and the issuers of auction-rate securities (ARS).

Following on the heels of the complaint (with ?smoking gun? email attachments) filed by Massachusetts securities regulators, Attorney General Cuomo clearly demonstrates that there are (at least) three categories of VERY DECEIVED individuals and entities.  First, customers who bought ARS.  Among other things, UBS top executives unloaded their own ARS -- $21 million worth between November 1, 2007 and February 12, 2008 ? when UBS became concerned, then worried, and indeed then panicked at its own precarious risk position due to holding increased ARS inventory resulting from its placing support bids in auctions for ARS which otherwise would have failed, all the way back to January, 2006.  Despite UBS? concern, and insider sales, UBS kept ARS investors in the dark until the day that it announced that it no longer would support ARS auctions!

Equally deceived were UBS brokers.  According to the complaint, in August, 2007 ?UBS felt tremors in the auction rate securities market that alerted it to potential liquidity concerns.?  In response to rising inventory, due to failed auctions, UBS executives devised a strategy to unload its inventory by convincing UBS financial advisers that they were great products for their customers.  As stated in an email by UBS? Global Head of Municipal Securities, ?We have encouraged our [Wealth Management] partners to mobilize the troops internally to focus on value so that we can move more [ARS] product through the system?this is our best and most effective way of hedging our exposure?.?  Even in February, 2008, when UBS was considering exiting the ARS auction business, calling it a ?complete loser?, UBS executives still were focused on increasing UBS customer sales, and misleading their own financial advisers.  In a conference call with advisers on February 8, 2008, UBS? Trading Desk Manager told advisers, ?The public auction market continues to clear hundreds of auctions daily, with lead broker-dealers frequently bidding to clear auctions when needed.  While broker-dealers are not obligated to bid in auctions, we do not have reason to change our current practice when UBS is lead underwriter.?  On February 13, 2008, UBS ceased supporting ARS auctions, which then immediately failed.

Last but not least are the issuers of ARS.  According to the complaint, ?Following UBS discontinuing its support of auctions, UBS embarked on an effort to profit from its decision ? by offer[ing] to restructure and refinance the auction-rate securities of the issuers into different products? for lucrative underwriting fees, of course.  UBS? Global Head of Municipal Securities remarked in an email that this was ?the single greatest opportunity in decades for us to leverage our banking relationships more now than ever as we embark on a journey to restructure a 300 bn [billion dollar] market in arcs [ARS]? This is a banker?s dream market.?

And a nightmare for UBS customers, UBS advisers and the issuers!

SNSFE continues to investigate and assist investors, as well as financial advisers and issuers, as they unravel this ARS debacle.