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UBS Settles in Massachusetts, Hit with New York Lawsuit

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Massachusetts Attorney General Martha Coakley says UBS will pay $1 million related to the sales of auction rate securities to certain Massachusetts towns and cities. Some of these funds will be used by the Attorney General’s office for education, training and assistance for treasurers and other financial officials of cities and towns with respect to appropriate investments, investment management practices, and financial controls.

This payment follows an agreement in May between UBS and the Attorney General, which led to the return of over $35 million in investments to 17 Massachusetts towns and cities, as well as the Massachusetts Turnpike Authority.

The Attorney General’s investigation, which began in February 2008, related to whether certain UBS employees sold auction rate securities to towns, cities and state entities, and inaccurately represented that those investments were permissible under Massachusetts law. This includes repayment to the towns of Norwood and Southborough and the cities of Fall River and Woburn, totaling some $3.4 million.

In the State of New York, Attorney General Andrew M. Cuomo has brought a multi-billion dollar securities fraud lawsuit against UBS, charging the firm with falsely selling and marketing auction rate securities as safe, highly liquid, and cash-equivalent securities. “UBS customers are holding more than $25 billion in illiquid, long-term paper as a result of UBS’ fraudulent misrepresentations and illegal conduct,” according to the Attorney General.

“It is frustrating that the New York Attorney General has filed this complaint while we have been fully engaged in good faith negotiations with his office to bring liquidity to our clients holding auction rate securities,” UBS says in a statement.

Cuomo says that as the securities market started to collapse, the bank’s top executives quickly sold off $21 million in personal holdings of auction rate securities, but continued to market the securities to its consumers. Internal UBS e-mails subpoenaed by Cuomo detail top executives’ efforts to sell off personal holdings of auction rate securities, his office says.

“As the NYAG is fully aware, UBS conducted our own internal investigation with the assistance of external counsel on sales of personal holdings of ARS,” UBS explains. “While UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals and are evaluating appropriate disciplinary measures for these individuals.”

As of February 2008, UBS had more than 50,000 customer accounts holding auction rate securities, including over 7,000 New York customer accounts, according to Cuomo’s office.

“UBS categorically rejects any claim that the firm engaged in a widespread campaign to move ARS inventory from the firm’s own books and into private client accounts,” the brokerage firm says. “Our records demonstrate that UBS built up its own inventory of ARS from $5.9 billion at the end of 2007 to approximately $11 billion at the end of 1Q08, while Wealth Management U.S. clients were reducing their positions.

“It is well known that UBS continued to support the auctions longer than any other major firm. UBS was first to offer clients loans of up to 100 percent of the par value of their ARS holdings at preferred-lending rates,” the company says. “UBS has acted in the clients’ best interests in this matter.”

Offshore, No More

In mid-July, a U.S. Senate subcommittee accused some foreign institutions of helping Americans evade some $100 billion in taxes a year. This came shortly after former UBS private banker Bradley Birkenfeld, 43, pleaded guilty in a Florida federal court to defrauding the IRS.

In a statement before the subcommittee, Mark Branson, CFO of UBS Global Wealth Management, has said, “On behalf of UBS, I am apologizing, and committing to you that we will take the actions necessary to see that this does not happen again.

“First, we have decided to exit entirely the business in question,” he explains. “That means UBS will no longer provide offshore banking or securities services to U.S. residents through our bank branches.”

“Second, we are working with the U.S. Government to identify the names of U.S. clients who may have engaged in tax fraud,” Branson says.

“UBS is committed to taking both corrective and disciplinary measures,” he concludes.

Janet Levaux, MBA/MA, is the managing editor of Research; reach her at [email protected].


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