New York to Launch Auction Rate Securities Suit Against UBS

One of the perverse side effects of the size and scale of the leading investment and universal banks is that it seems they are largely immune to the traditionally-crippling effects of a serious lawsuit or regulatory failing. Salomon Brothers, a Wall Street powerhouse in the 1980s was seriously wounded in its Treasury bond scandal and never recovered. It limped for a while and was acquired by Sandy Weill. Bankers Trust was done in by two lawsuits by corporate clients about its less than savory sales practices. Kidder had what amounted to an accounting scandal (Joe Jett never lost them any money, but managed to create phantom profits), which was the last straw as far as its recent acquirer GE was concerned. The firm was sold not long after its assets to PaineWebber.

But UBS is a different breed, and while the current spate of lawsuits will presumably dent its franchise, it is highly unlikely that a single or even multiple lawsuits will bring it to its knees. The biggest danger to Swiss banks generally are the ongoing efforts by international tax authorities to chip away at Swiss banking secrecy, and those do appear to be bearing fruit. The latest score, the prosecution of former UBS private banker Bradley Birkenfield, has led the Swiss giant to cease serving US customer out of non-US branches. But that’s only a dent in its private banking business. although the fact that the bank is cooperating in the investigation of 19.000 US customers may lead customers from advanced economies hiding from their tax man to rethink their arrangements.

By comparison, though the mushrooming lawsuits relative to the bank’s alleged poor conduct in the auction rate securities market are not life threatening, they reveal close to boiler-room behavior in a supposedly upscale firm (UBS purportedly ramped up its sales efforts to retail customers in an aggressive effort to unload inventory when it knew the marker was about to fail)

Massachusetts has already filed a suit which includes some truly embarrassing e-mails. New York is ramping up the pressure by launching a civll action of its own.

From the Wall Street Journal:

New York state Attorney General Andrew Cuomo is making preparations to file civil securities-fraud charges against UBS AG, possibly as early as this week — the first of several cases that could grow out of New York’s investigations into the auction-rate-securities market and another blow for the industry and UBS.

State securities regulators in Massachusetts have already filed charges against UBS. Mr. Cuomo’s office could file charges against other entities it is investigating in coming weeks, say people familiar with the investigation.

The lawsuit also could include allegations of malfeasance by senior UBS executives, say people familiar with the investigation. It wasn’t clear which individuals would be named or whether charges against individuals would be filed..

Because UBS’s trading operations for auction-rate securities are based in New York, the Cuomo lawsuit could seek a broad resolution for UBS auction-rate clients nationwide. That could entail a settlement that would let customers cash in at face value securities that for months have been illiquid…

Mr. Cuomo launched his investigation into the market in April, subpoenaing 18 institutions. The probe expanded this summer to consider potential liability by individuals at UBS and a wider array of financial institutions, say people familiar with the investigation.

The New York attorney general’s office has now subpoenaed 30 entities and 100 individuals, seeking information about the sales of auction-rate securities. Among those subpoenaed are Citigroup Inc., Merrill Lynch & Co., J.P. Morgan Chase & Co. and Goldman Sachs Group, Inc., and high-ranking executives at various firms as well as heads of municipal-bond desks, risk managers, financial advisors and others.

The charges would follow actions taken by Missouri securities regulators last week to demand documents and interviews at Wachovia Corp. brokerage offices in St. Louis. Missouri Secretary of State Robin Carnahan said state regulators escalated their investigation into Wachovia in part because the firm was slow to respond to information requests.

UBS last week responded to pressure from regulators and investors to buy back at face value some auction-rate securities held by investors. The firm announced a plan to repurchase up to $3.5 billion of tax-exempt auction-rate securities from clients, package them and sell new debt backed by those securities to money-market funds.

The firm also settled in May with the Massachusetts attorney general’s office to return $37 million to the Massachusetts Turnpike Authority and 17 municipalities that invested in auction-rate securities after UBS agreed they were not permissible investments under the municipalities’ official investment mandates.

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  1. Scott

    Hopefully Mr. Cuomo doesn’t have any skeletons in his closet. He wouldn’t want to get Spitzered…mess with Wall Street and bad things seem to happen.

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