Massachusetts Hits UBS with Fraud Charges Over Auction-Rate Securities


On June 26, Massachusetts securities regulators charged UBS with fraud stating that the major Wall Street firm was pushing its brokers to sell auction-rate securities without making proper disclosures to investors for months after the firm knew the market for auction-rate securities was on the brink of collapse. Other firms that are currently under investigation by a state task force include Wachovia, Merrill Lynch and Bank of America Corp. In addition, the Attorney General for the State of New York, who opted out of the task force, has subpoenaed records from 18 institutions including UBS, Citigroup, Merrill Lynch, J.P. Morgan Chase & Co. and Goldman Sachs Group. Additional firms that have been mentioned in the auction-rate securities market fiasco are Lehman Brothers and Bear Stearns Cos. The SEC and Financial Industry Regulatory Authority are also investigating the sales practices and disclosures firms made to investors with respect to auction-rate securities. UBS was the second largest underwriter of auction-rate securities from 2000 to 2007, second to Citigroup.

The auction-rate securities market collapsed in February of this year leaving investors to hold securities they had been led to believe were as good as cash. The allegations against UBS state that the firm knew the market for these securities was in trouble in 2007 yet continued to promote them to investors as “safe, liquid cash alternatives.” UBS served as the underwriter for the securities it was selling and had begun to prop up the market by purchasing some of the securities at auction so that the auctions would not fail. UBS purchased more than its internal risk management parameters allowed and so it began an aggressive marketing campaign to sell these troubled securities to individual investors without disclosing UBS’s involvement in propping up the market by bidding on the auctions or the conflict of interest it had as both issuer and marketer of these securities. At this same time, David Shulman, the head of UBS’s municipal securities group, liquidated his holdings of auction-rate securities. J. Boyd Page, an attorney at Page Perry in Atlanta specializing in securities fraud, is quoted in a June 27 article on as saying, “The increasing risks that developed in 2007 were known to the financial services firms that sold them, but were not disclosed to investors who bought them.”

Several internal UBS e-mails show that the risks of auction-rate securities had been identified by UBS as early as August of 2007, yet at this same time a flurry of conference calls with salesmen began giving them new marketing materials to promote the bonds to unsuspecting investors. In a note dated August 30, David Shulman stated, “The pressure is on to move inventory.” E-mails released in the Massachusetts action against UBS also show that financial advisers were paid a marketing fee from the periodic auctions.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing institutional and individual investors in auction-rate securities cases. For further information, please contact us.