UBS to Return $35 Million to Massachusetts Municipalities

UBS Securities LLC will give back $35 million to cities and towns in Massachusetts due to allegations that the investment bank led municipalities into risky investments involving auction-rate securities.

Attorney General Martha Coakley yesterday announced that her office reached an agreement with UBS and is reviewing potential penalties in relation to possible violations the bank may have made under the state's False Claims Act.

"We appreciate that UBS has taken action to return the invested monies to our cities, towns, and other government entities," Coakley said in a press release. "In these tight financial times, Massachusetts municipalities need to have access to their monies and to invest them appropriately."

The payout comes amid news this week that UBS will shut down its municipal bond department or sell off all or a portion of its municipal bond business. The bank Tuesday reported 2008 first-quarter losses of $11 billion.

The agreement affects 17 local governments, along with the Massachusetts Turnpike Authority. MassPike will receive $4.3 million from UBS and the town of Winchester, nine miles north of Boston, will regain the largest amount, $6.75 million, according to Coakley spokeswoman Amie Breton.

In February, Coakley's office began its investigation of allegations that UBS misled municipalities regarding their to use of auction-rate securities as investments under Massachusetts law. The auction-rate market began to fail in early February after investment banks declined to buy unsold auction-rate bonds at auction, forcing investors - in this case, MassPike and the 17 municipalities - to keep bonds they were hoping to unload and requiring issuers to pay higher interest rates.

"Since the auction failures, the Massachusetts cities, towns, and other government entities who have invested in auction-rate securities have been forced to hold these securities in order to avoid principal losses," according to the press release. "UBS' action today will allow these entities to recover these frozen funds."

UBS spokeswoman, Karina Byrne said via email that the bank “is pleased this matter is resolved” and said the issue pertained to Massachusetts law that restricts municipalities from investing in auction-rate securities.

“The agreement addresses particular ARS transactions that were not permissible for these public entities’ accounts under applicable law,” Byrne wrote. “The reasons supporting this agreement apply only to the circumstances of this specific case under Massachusetts law.”

Along with Winchester and MassPike, the affected entities include the towns of Andover, Barnstable, Belchertown, Boylston, Dedham, East Longmeadow, Hudson, Mattapoisett, Merrimac, Needham, Warren, Wayland, Westborough, and Whitman, and the cities of Chicopee and Holyoke.

Breton declined to say whether the attorney general's office is currently investigating, or has plans to investigate, other investment banks in relation to investments made by local governments and state entities.

The UBS payout follows a Feb. 3 agreement between Merrill Lynch & Co. and Secretary of the Commonwealth William Francis Galvin, in which Merrill will pay Springfield $13.9 million for risky collateralized debt obligation investments the firm made on behalf of the city - investments that dropped in value by more than $12 million in nine months.

 

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