One of Connecticut’s wealthiest families has recently brought an attachment suit against UBS AG, UBS Securities, LLC and UBS Financial Services, Inc. in an effort to require UBS to set aside $150 million to cover a potential reward in an ongoing FINRA arbitration concerning auction rate securities “ARS”).  Arnold Chase Family, LLC, et al. v. UBS AG, et al., C.A. No. 08-00581 (D. Conn. April 17, 2008).

In their Application for Prejudgment Remedy in Aid of Arbitration, the Chase family alleges generally that:  (1) plaintiffs invested cash with UBS; (2) nearly $75 million of the cash was invested by UBS in ARS; (3) UBS represented such ARS to be “cash alternatives”; (4) ARS are not, in fact, cash alternatives; (5) the ARS now have no marketability and have already been marked down below par value; (6) plaintiffs have demanded return of their funds, but UBS has refused to do so; and (7) plaintiffs have brought an arbitration claim before FINRA to recover their funds.  Plaintiffs therefore seek a $150 million attachment on the assets and goods of the estate of UBS to protect their potential recovery in the ongoing FINRA arbitration.

These allegations mirror those that have been under investigation by various authorities over the last several months.  See prior InsureReinsure.com posts here, here, here, here and here.

The plaintiffs’ previously publicly unavailable Statement of Claim and Amended Statement of Claim, which were attached as exhibits to their filings in the litigation allege that they first purchased ARS in August 1999 when approached by representatives of Paine Webber, a broker-dealer since acquired by UBS.  They further allege that Paine Webber represented at that time that ARS were (a) 90 to 95% guaranteed by the federal government with an interest yield in excess of treasury bills and money market funds; (b) the equivalent of or an alternative to cash; (c) liquid, with principal easily returned to the purchaser; and (d) part of a multi-million dollar market operated by Paine Webber in which the ARS could be purchased and sold.  The Chase family further alleges that these representations were repeated from time to time in form and substance up through the middle of 2007.  Finally, they allege that they relied upon these representations in purchasing nearly $75 million in ARS, including $50 million in mid-2007.

The Chase Family further alleges in their Amended Statement of Claim that the following risks, factors and “conflicts” regarding ARS were not disclosed to them by UBS:

          (1) In the  event of a failed auction, ARS would become illiquid in that current securities holders would be unable to sell their securities.

          (2) Information and risk factors disclosed in securities prospectuses but not provided to individual ARS purchasers.

          (3) Brokers-dealers would often engage in a number of practices to influence the auction process, including, for example, submitting their own orders to purchase or sell securities for their own accounts to maintain liquidity, as they claimed the investments were liquid to claimants.

          (4) Fees, commission and profit-based incentives that existed for UBS and its individual financial advisers to sell customers ARS.

          (5) ARS “were not cash alternatives or like money market funds, and were instead, complex, long-term financial instruments with 30 year maturity dates or longer and the liquidity of which was not assured.”

          (6) The liquidity of ARS depended “at least in part on the auction market being maintained by UBS.  This was particularly true since the default rates of the ARS purchased for claimants’ accounts were less than the purported market rates.”

          (7) “ . . . in connection with the sale of auction rate securities, UBS simultaneously was acting on behalf of the issuer, who had an interest in paying the lowest possible interest rate, on behalf of the investor, who was seeking the highest possible return, and on its own behalf, to maximize the return to UBS on its holdings of the auction rate securities.”

          (8) “ . . .  the auctions [UBS] was conducting were not governed by arms-length transactions but instead, included allowing customers to place open or market orders in auctions, intervening in auctions by bidding for UBS’s proprietary account or asking customers to make or change orders, preventing failed auctions and all-hold auctions to set the market rate, submitting or changing orders after auction deadlines, not requiring customers to purchase partially-filled irrevocable orders, providing certain customers with higher returns than the auction clearing rate, and providing inside information about the auction process to certain customers in connection with the auction bidding.”

For a full copy of the Chase Family’s Amended Statement of Claim, please click here.

UBS has moved to dismiss the suit on the basis that it is barred by the arbitration clause contained within the Chase Family’s account agreements.  For a full copy of the UBS memorandum in support of motion to dismiss, please click here.

The Chase Family filed their opposition to the motion to dismiss on June 17, 2008, a full copy of which is available here.

We will continue to monitor this litigation and provide updates on InsureReinsure.com.