New York Sues UBS — Fraud in Selling Mortgage Backed Securities

Editor’s Note. The significance of this to those involved in foreclosure defense and offense is that the entire transaction is being laid out for us by the State investigations and lawsuits. The fraud was at both ends of the transaction — over-appraisal of the value, under appraisal of risk and outright deception and negligence in the sale of the securities that funded the loans and the same behavior as to the property values and mortgage instruments in the sale of loans to consumers.

And the “free market” enthusiasts that oppose a bailout for homeowners suddenly don’t like their own theory when the chips fall back on them. The SINGLE TRANSACTION approach advocated in this blog is the key to proving your case. Pay attention to both ends and all the logistical errors and ignorance of property law that took place in between the investor’s funding of the loan and the borrower signing the loan documents.

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July 25, 2008

New York Sues UBS for Securities Fraud

The attorney general of New York accused UBS of consumer and securities fraud on Thursday, saying the bank had misled investors when it sold them auction-rate securities.

Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. But the $300 billion market for these instruments collapsed in February, trapping investors who had been told that they were safe and easy to cash in.

Even as a senior executive at UBS called the market “a complete loser,” the bank continued to pitch the securities as short-term, liquid investments, according to the civil complaint filed by Andrew M. Cuomo, attorney general of New York.

At the same time, seven executives at the bank sold their personal holdings of the securities, which totaled $21 million, to avoid losses, according to the complaint.

“Once they knew the auctions were failing, they removed their personal money and corporate money from the auctions and were still bringing consumers into the auctions,” Mr. Cuomo said. “Now people have their funds locked up in a way they can’t access them.”

UBS halted the auctions of these securities on Feb. 13, leaving more than 50,000 UBS customers holding about $37 billion in the investments, according to the complaint. These investors — city governments, companies, individual investors — remain unable to sell them in many cases.

UBS has offered to lend its customers up to 100 percent of the value of the securities until liquidity returns. Mr. Cuomo has asked the bank to return the full value of the securities to investors in cash.

The bank rebutted Mr. Cuomo’s accusations. “We will vigorously defend ourselves against this complaint,” UBS said. “It is frustrating that the New York attorney general has filed this complaint while we have been fully engaged in good-faith negotiations with his office to bring liquidity to our clients holding auction-rate securities.”

Mr. Cuomo’s office is the third state authority take UBS to task over the auction-rate market, after William F. Galvin, the secretary of the Commonwealth of Massachusetts, and the Texas State Securities Board.

Mr. Cuomo’s case could have greater impact because UBS’s bond desk is based in New York, giving Mr. Cuomo the right to bring a case on behalf of UBS customers everywhere.

The case centers on e-mail messages among UBS executives and the attorney general expects to bring several more cases in coming weeks related to the auction-rate market.

At UBS, senior executives were aware of the growing problem in the auction-rate market by December last year and, despite concerns from the bank’s risk officer, they covered up problems while continuing to sell the securities to investors, the New York complaint says.

In January, when UBS executives halted some of the auctions, the bank’s head of public finance banking wrote in an e-mail message that UBS officials should not tell bankers about those auctions because “it will be another indication (perhaps preliminarily) that we are killing this thing.”

The bank’s global head of municipal securities wrote some of the more colorful e-mail messages, saying in January that it would be “scary and delicate” to tell the bank’s financial advisers who sold the securities about the growing problem. In February, that executive described the situation in the market as “absolute torture.”

Lawyers specializing in white-collar crime said they expected to see many more cases filed in the coming months. Bank of America, Merrill Lynch and Wachovia have been named by other state regulators as targets in auction-rate investigations.

“When there is a financial crisis and the public is looking for scalps, the law enforcement officers will respond in kind,” said Bradley D. Simon, a lawyer with Simon & Partners in New York.

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