In the wake of a lawsuit by the Massachusetts Securities Division alleging fraudulent sales of auction rate securities (“ARS”), UBS AG reportedly plans to buy back as much as $3.5 billion in ARS-impacted preferred shares issued by tax-exempt closed-end funds.  According to reports, the plan does not include auction rate debt from municipal bonds and student loans.

UBS will reportedly fund the repurchase by reissuing the shares in a private placement offered to institutional investors, including money-market funds.  Such shares would reportedly have a put option, guaranteeing purchasers the ability to subsequently sell the shares despite the troubled state of the ARS market.

It remains to be seen whether other brokers will also commit to ARS-related buy backs.

For discussion of the Massachusetts Securities Division lawsuit, please click here.