UBS Securities LLC and UBS Financial Services Inc. offered a defense against securities fraud allegations made by Massachusetts Secretary of State William Galvin in its marketing of auction-rate securities in a filing that said statements made to its clients "were not false or misleading at the time they were made."
Galvin suedUBS Securities and UBS Financial Services last month for allegedly selling retail investors auction-rate paper as "liquid, safe, money-market" at a time when the auctions would have failed without support from dealers.
In its reply to Galvin's 100-page complaint, UBS said that its actions had been "honest and ethical" and that any misrepresentations or omissions the bank had made were made in "good faith." UBS said that no "actionable omissions" had been made and it denied that any misrepresentations or omissions on its part had caused investors to lose money.
Galvin's suit alleges that UBS did not fully disclose risks to investors who ended up with illiquid securities when the estimated $328 billion ARS market froze up in mid-February. The ARS market included municipal debt, student loan debt, and closed-end funds. The suit also alleges that UBS pressured its wealth management advisers to get their clients to invest in ARS at a time when UBS had been considering getting out of the ARS market.
"During late 2007 and early 2008, while the auction-rate market faced extreme pressures as a result of market conditions, UBS remained committed to supporting the auctions, increasing its own inventory of ARS to over $11 billion in an attempt to maintain liquidity for its ARS holders," the UBS reply stated. The bank said in its reply that it had taken "substantial measures to attempt to ensure that customers maintain liquidity in their ARS holdings and to restructure issues to permit redemption by ARS holders."
The bank is being represented by Debevoise & Plimpton LLP.
The content of UBS' reply, which was submitted on July 17, was first published by Bloomberg LP.
Last week New York State Attorney General Andrew Cuomo sued both entities with a similar complaint. The New York civil suit seeks to force the bank to buy back ARS from its customers across the nation at par. UBS customers currently hold more than $25 billion of illiquid ARS, Cuomo said. That investigation is ongoing and is not limited to UBS though no other banks have been named.
Texas is considering suspending UBS AG's broker-dealer and financial services license. A September hearing will consider whether the bank misrepresented and failed to disclose information about the liquidity and risks of the auction rate market.