The Bill Gets Bigger for UBS

The agreement settles charges by the New York Attorney General (NYAG), the Massachusetts Securities Division, the Securities and Exchange Commission (SEC), and other state regulatory agencies represented by North American Securities Administrators Association (NASAA).

UBS committed to provide liquidity solutions to institutional investors and will agree from June 2010 to purchase all or any of the remaining $10.3 billion, at par, from its institutional clients, the company said. In July, UBS announced it would buy back as much as $3.5 billion of ARS preferred shares issued by tax-exempt closed-end funds managed by firms such as BlackRock Inc. and Nuveen Investments Inc., not including auction-rate debt from municipalities or student-loan providers (see UBS Plans to Buy Back Auction-Rate Securities).

In May, UBS Financial Services Inc. reached an agreement with Massachusetts Attorney General Martha Coakley to return $37 million to 17 cities and towns, as well as to the Massachusetts Turnpike Authority, for allegedly misleading them about the investments (see UBS Agrees to Repay Investors of Risky Securities).

Under the agreement, in principle, UBS has committed to purchase a total of $8.3 billion of ARS, at par, from most private clients during a two-year time period beginning January 1, 2009. According to the UBS announcement, private clients and charities holding less than $1 million in household assets at UBS will be able to avail themselves of this relief beginning Oct. 31, 2008. From mid-September, UBS will provide loans at no cost to the client for the par value of their ARS holdings.

The firm also agreed to pay a fine of $150 million to $75 million to the state of New York and $75 million to other state regulatory agencies. UBS neither admits nor denies allegations of wrongdoing.

Massachusetts securities regulator William Galvin in June (see UBS Securities Faces Charges of Fraud by Mass. Authority) and New York Attorney General Andrew Cuomo in July (see NY Next to Target UBS) filed suits alleging the Zurich-based bank committed fraud, misleading investors by its marketing of the long-term securities as money market-like instruments that were easy to buy and sell, and that it continued selling the debt even as the market unraveled and top bank executives unloaded $21 million in personal auction-rate holdings.

Afterwards, the bank suspended its head of fixed income in the U.S. and global head of municipal securities, David Shulman (see UBS Benches Fixed Income Head Amid Auction-Rate Probes).

The Massachusetts Secretary of the Commonwealth then charged Merrill Lynch & Co. with fraud over charges it marketed auction-rate securities while not accurately disclosing the potential market risks (see Massachusetts Charges Merrill with Fraud over ARS Sales).