Cuomo sues UBS over debt securities
The legal battle over the mess in the market for so-called auction-rate debt escalated Thursday as New York Atty. Gen. Andrew Cuomo stepped into the fray.
Cuomo alleged in a lawsuit that the global investment bank UBS pushed customers into auction-rate securities during the last year even though the market was crumbling and the firm’s own executives were dumping their holdings.
UBS and other brokerages pitched the securities as safe and easily redeemable, telling customers the investments were as liquid as money-market funds.
But UBS didn’t divulge that it was scrambling to remove the securities from its own books or that its executives were cashing in $21 million of their own holdings, according to the suit filed in New York state court.
“You can’t have two sets of rules,” Cuomo said at a news conference. “You can’t have one set of rules for customers and another set of rules for executives and the corporation.”
Auction-rate securities are, in effect, long-term debt instruments that were marketed as short-term debt. The interest rates on the securities were structured to reset in auctions every seven to 35 days. Municipalities and closed-end mutual funds issued more than $300 billion of the debt in recent years because it was a relatively cheap way to borrow.
But the reset auctions ground to a halt in February as the credit crunch intensified and demand dried up for complex securities of any sort. That left many individual investors unable to sell their auction-rate holdings.
About half of the securities have since been converted into fixed-rate debt that the affected investors can sell to get their money back, said Thomas Doe, president of Municipal Market Advisors, a Concord, Mass.-based muni-bond research firm.
UBS denied wrongdoing, saying it didn’t try to fob off troubled securities onto customers. But the firm said it was considering disciplining some employees who exercised “poor judgment” in dealing with auction-rate securities.
The firm complained in a statement that Cuomo “has filed this complaint while we have been fully engaged in good-faith negotiations with his office to bring liquidity to our clients.”
Help can’t come fast enough for investors who still are stranded in the securities.
Eric Handler, a 37-year-old Los Angeles resident, has the bulk of his savings in auction-rate issues. His brokerage hasn’t yet made good on its repeated promise to free up his money.
“I haven’t gotten a penny,” Handler said. “With everything going on with the mortgage crisis, this one is just as big for a lot of people.”
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