Regulator’s Complaint Against UBS Securities

							                        Regulator’s Complaint Against UBS Securities
                     Exposes Significant Conflicts of Interest and Omissions
                             In The Sale of Auction Rate Securities


        On June 26th, Massachusetts securities regulators sued UBS Securities and UBS Financial
Services for their role in the auction rate securities (“ARS”) debacle that has plagued not only
UBS but several other financial services firms. In addition to other relief, the 101-page
complaint seeks an order requiring UBS to offer to rescind sales of ARS at par (purchase price),
or to offer restitution to investors who already sold their ARS below par.

       Much like the emails that Eliot Spitzer uncovered to expose Wall Street‟s widespread,
undisclosed conflicts of interest in the research analyst cases, Massachusetts securities regulators
have uncovered scores of emails from UBS executives that make UBS‟ denial of liability border
on laughable if not absurd.

        Let‟s examine the more important charges that Massachusetts securities regulators have
lodged against UBS. First, “typically” UBS sold ARS to investors as “liquid, safe, money-
market instruments”, and UBS‟ marketing materials promoted and classified ARS as “Cash &
Cash Alternatives Addressing our short-term needs” through February, 2008. Additionally, UBS
listed ARS on client statements under the titles “cash alternatives/municipal securities” and “cash
alternatives/money market instruments.” Investors, according to the complaint, were told that
interest rates were set in periodic auctions, and that either the ARS “were readily tradable in
auctions” which typically occurred every 7 or 28 days, or that the instruments “matured” in 7 or
28 days. However, the truth (or material omissions) was quite contrary to the oral and written
representations. According to the complaint, investors were not informed that:

              UBS submitted a support bid for every auction for which it was the lead or sole
               broker-dealer to ensure that the auction would not fail;
              UBS, in August, 2007, intentionally let certain auctions fail because there were
               not sufficient buyers and UBS did not want to own more of the ARS paper that it
               had been trying to auction off;
              UBS offered only the ARS products that it had underwritten and was trying to
               distribute; and
              UBS itself set the interest rate in most of the auctions with the bids it submitted,
               to actively manage the interest rates so that they would be just high enough to
               move the ARS it had underwritten but not so high as to make the issuers that were
               its underwriting clients unhappy.

        Second, the complaint alleges that UBS‟ clients “were also in the dark concerning the
dangerous increase in auction rate security inventory that UBS was carrying on its books
beginning during the Fall of 2007 and continuing through to February, 2008.” Indeed, UBS
failed to inform clients that:




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                UBS‟ short-term trading desk had exceeded, multiple times in 2007 and early
                 2008, the amount of capital it was authorized to support the auctions and
                 repeatedly had to request an increase in that cap;
                UBS engaged in “extreme efforts” to decrease its inventory of ARS at the
                 insistence of its risk management department;
                UBS, as early as September, 2007, “was actively considering scenarios which
                 included pulling out of its auction program altogether”; and
                By the end of October, 2007, David Shulman (Global Head Municipal Securities
                 Group and Head of Fixed Income Americas at UBS Securities) described the
                 auction rate program as “a huge albatross”, and in a December 11th email stated
                 that “auctions aren‟t going to come back”.

        Third, to alleviate the “enormous amount of stress” that UBS‟ auction rate program was
experiencing, given the buildup of its ARS inventory, the complaint alleges that UBS
orchestrated a major marketing push to convince unsuspecting retail investors to buy ARS from
UBS‟ inventory. Indeed, the complaint alleges that Shulman himself “orchestrated an all-out
sales effort in order to get retail customers to see the „value‟ in ARS at the prices at which UBS
was willing to offer them” – all the while Shulman was selling his own ARS holdings! In that
regard, Massachusetts regulators “uncovered a profound disconnect between UBS‟
understanding to the ARS it was selling and the FA‟s [financial advisers‟] explanations of these
securities to their customers.” UBS continued to promote the sale and did sell ARS to its
customers right up until the day that it decided to abandon its auction program, February 13,
2008.

        No doubt, other financial services firms involved in ARS will see similar charges of
conflicts of interests and omissions as detailed by Massachusetts regulators against UBS.
Likewise, other states, even the SEC and FINRA, may follow suit. In the meantime, it is most
apparent that investors should consider their arbitration and litigation options to remedy the great
wrongs that have been committed!


About the Author: James J. Eccleston leads the Securities group at the Chicago law firm of Shaheen, Novoselsky,
Staat, Filipowski & Eccleston, P.C., where he represents investors in recovering investment losses and financial
services professionals in disciplinary, employment, and compliance matters. He has held numerous securities
licenses and Chicago Bar Association leadership positions and serves as an arbitrator and mediator. He is a
recipient of Martindale-Hubbell’s highest rating (AV) for legal ability and ethics and is named to the Illinois Super
Lawyer and Leading Lawyer lists.
JEccleston@snsfe-law.com, 312.621.4400, www.snsfe-law.com, www.financialcounsel.com




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