Massachusetts securities regulators today are expected to file civil fraud charges against UBS Financial Services Inc. for allegedly selling investments it claimed were as safe as cash even though the Swiss firm knew they were risky, according to a state official briefed on the case.
The complaint, to be filed by the state Securities Division, is expected to allege that UBS knowingly let its brokers sell so-called auction-rate securities – a type of bond issued by nonprofits and municipalities – without warning investors that they might have trouble getting their money back, the Massachusetts official said.
UBS spokeswoman Karina Byrne said the firm had not yet been notified of any complaint. “UBS has been providing information to the Massachusetts Securities Division and we are committed to helping our clients who have been adversely affected by the unprecedented marketwide loss of liquidity in auction rate securities,” she said.
The Globe previously reported that UBS brokers were still making sales early this year, when the firm knew the multibillion-dollar trading market for these securi ties was on the brink of collapse – another victim of the credit crisis that was then sweeping financial markets.
The market did indeed collapse on Feb. 13 and has remained closed since, leaving trapped investors with an estimated $220 billion worth of securities they cannot sell.
The state is looking to force UBS to return all investor funds in these investments and will seek to have the firm pay a fine.
Last month, UBS agreed to buy back $37 million worth of these securities sold to 17 Massachusetts towns and cities and to the Massachusetts Turnpike Authority, under an agreement with Attorney General Martha Coakley.
Little known before the market froze, auction-rate securities have ensnared the savings of thousands of investors across the country, many of them retirees who put their life savings into the investments on the advice of their brokers.
As reported by the Globe, UBS investment bankers were warning some large clients of the market’s looming problems while, at the same time, continuing to permit brokers to sell the investments to individual investors without providing them with similar warnings.
As a result, clients seeking risk-free investments purchased securities they were led to believe would be as safe as money market funds. Indeed, even many brokers from UBS and other investment firms appear to have been surprised by the market’s shutdown.
Massachusetts regulators have been investigating UBS and two other firms, Banc of America Investment Services Inc. and Merrill Lynch & Co., since March, shortly after the auction-rate markets failed. Those investigations are ongoing, according to the state official. New Hampshire regulators also are probing UBS.
Auction-rate securities are primarily the long-term debt of student lenders and municipalities. They traded for years in private markets run by brokers, where weekly or monthly auctions reset the interest rates on the securities. Typically, those rates were a little higher than those of money-market funds.
What most investors didn’t know was that the auction-rate market functioned only as long as buyers and sellers placed bids for the bonds on a routine basis. The brokers who ran the auctions, including UBS, in February decided to stop trying to keep the auctions going by using their own funds to buy the bonds.
One of the many people interviewed by state investigators was Richard Stahl, a retired auto dealer in Hollis, N.H., whose ordeal was detailed by the Globe. He has $1.4 million tied up in auction-rate securities, half in bonds issued by a New Hampshire student lender. That student lender had been advised by UBS, its investment banker, to offer a sharply higher interest rate to generate demand for its bonds if the market began to shut.
The lender, the New Hampshire Higher Education Loan Corp., agreed to the higher rate deal in mid-December. It did so “at the suggestion of UBS Securities LLC, its investment banker and broker-dealer, in order to respond to disruptions in the auction-rate securities market and attempt to prevent ‘failed auctions,’ ” the lender said in a letter to investors on its website.
But individual investors have said that UBS did not share its concerns about the market with them. Weeks later, in January, a UBS broker sold the New Hampshire group’s bonds to Stahl, promising him the investments were as safe as cash. Stahl said he received no warning about the bonds’ risks.
In February, Stahl learned that he could not sell the bonds because the trading market had closed.
In May, UBS stopped listing these investments under “cash” on customer statements and started listing them under the category of “fixed income,” or bonds. The change is an acknowledgement that the securities were not equivalent to cash, but in fact carried risks, as do bonds, which can fluctuate in value.
UBS also has been marking down the value of these investments on customer statements. The firm has reduced the value of some student-loan and other auction-rate bonds by at least 5 percent, and sometimes by much more, according to customer statements reviewed by the Globe.
Lance Pan, director of investment research at Capital Advisors Group Inc. in Newton, said UBS and other investment banks should buy back the securities. “Investment bankers can and should take them back on the balance sheet. I don’t see why they don’t do that, for business reasons,” Pan said.
Beth Healy can be reached at email@example.com
By Beth Healy