The Enforcement Section of the Massachusetts Securities Division recently filed an administrative complaint against UBS Securities, LLC and UBS Financial Services, Inc. alleging conflicts of interest and use of misleading sales practices in the marketing of auction rate securities (“ARS”).  In the Matter of UBS Securities, LLC and UBS Financial Services, Inc., Docket No. 2008-0045 (Mass. Sec. Div. June 26, 2008).

The Complaint alleges that, beginning in February 2008, the Massachusetts Securities Division began receiving numerous telephone complaints from UBS customers who claimed they had been sold ARS as safe and liquid investments, but now could not sell those investments at any price.  According to the Complaint:

The common theme of all of the customers that contacted the Division was that the money UBS placed into ARS was intended to be their safe money and that it would be 100 percent principal-protected and completely (subject to the 7-day or 28-day auction delay) liquid.  Investors that purchased those securities ranged from retirees, who sought to invest their money in ultra-safe, liquid investments that they could access if they needed the funds, to small business owners who needed to park operational cash in highly-liquid instruments to be accessed upon short notice for continuing operations and upcoming projects.

The Complaint alleges that investors were not informed about the risk that the auctions might fail.  It further alleges that the following conflicts of interest were not disclosed: (1) The ARS products offered to the investors were underwritten by UBS; (2) UBS submitted a support bid for every ARS auction for which it was the lead or sole broker-dealer to ensure that the auction did not fail; (3) UBS itself set the interest rate in most of the ARS auctions; (4) UBS actively managed the interest rates so that they would be high enough to sell but not too high to negatively impact the issuers for whom UBS had underwritten the ARS; and (5) In August 2007, UBS intentionally allowed certain auctions to fail because there were not sufficient buyers and UBS did not wish to own any more ARS.  Finally, the Complaint alleges that, despite internal discussions throughout the Fall of 2007 about the deterioration of the ARS market, UBS failed to disclose developing risks to its customers.

Based upon these allegations, the complaint asserts violation of the Massachusetts Uniform Securities Act, M.G.L. c. 110A, and accompanying regulations, 950 CMR 10.00 et seq.  As relief, the Enforcement Section seeks a cease and desist and censure order, rescission at par of all ARS sales by UBS and imposition of an administrative fine.

For a full copy of the complaint, please click here.