Today UBS tentatively agreed to buy-back $19.4 billion in auction-rate securities in order to resolve regulatory actions initiated by the Massachusetts Secretary of State, other members of a state auction-rate securities task force and the SEC. In addition, the firm agreed to pay a $150 million fine to settle the regulatory claims. The full details of the settlement will be announced next week.
The regulatory investigation asserted that UBS pressured financial advisors to sell auction-rate securities as cash equivalents that were safe and liquid without disclosing significant risks to investors. At the same time that UBS was engaged in this aggressive sale campaign, the firm, internally, was extremely concerned about the auction-rate securities markets and was exploring exiting the same. Ultimately, investors sustained significant harm when UBS and other securities dealers stopped supporting the auction-rate securities markets and auctions froze. UBS’ legal exposure was particularly severe in light of the fact that various UBS insiders were simultaneously disposing of their own auction-rate securities while the firm was encouraging investors to purchase the same.