Auction Rate Securities
UBS is being charged with civil fraud for selling investments that the Swiss bank knew were not safe. According to a 101-page complaint filed by William Galvin, the Massachusetts’ Secretary of State, UBS representatives told investors that auction-rate securities such as preferred shares in closed-end mutual funds, long-term debt issued by local governments or backed by a pool of student loans were “safe, liquid ‘cash alternatives’” earning higher interest rates than T-Bills or money market accounts. The complaint alleges that “[T]he actual reality, well-known to UBS but undisclosed to its customers, was that in fact no true auctions existed for many of these securities.” The complaint further charges that UBS stepped up its sales campaign to investors even as large corporate cash managers were turning away from auction rate securities and its own inventory was swelling.
Other banks are caught up in this Auction Rate Securities debacle. This multi-billion dollar market collapsed in the beginning of 2008. There are allegations that these large banks, investment firms and financial institutions encouraged their individual investor clients to cash in their CDs or money market accounts, because there was no risk in something called auction rate securities. Individual investors were told by these banks and financial institutions various misrepresentations to make large purchases of auction rate securities while large institutional clients were being told to dump these securities. The market collapsed in early 2008 and then the investors who had purchased these securities were told they could not access their funds. The banks began grooming their customers with notices that these ARS investments were going to be regrouped on their client statements from cash equivalents to municipal bonds, corporate bonds, or preferred stocks that can be issued by municipalities, tax-exempt institutions, and closed-end mutual funds. Even worse, the banks are offering to “loan” their customers funds at lending rates for the value of the ARS holdings. Most major broker-dealers have withdrawn from the auction market for these securities which means that over $350 billion in auction-rate securities are now illiquid and are creating severe hardships for investors.
