$19.4B Auction-Rate Securities Buy-Back Will Hit UBS Harder

August 8, 2008 3:08 p.m. EST

Washington, D.C. (AHN) - Switzerland banking giant UBS AG agreed on Friday to buy back $19.4 billion in investments after it was charged with wrongly selling of auction-rate securities during a widespread probe.

On July 24, the firm was served with a lawsuit by New York Attorney General Andrew Cuomo over auction-rate securities, accusing the firm of a "multibillion-dollar consumer and securities fraud."

The first financial services firm to settle in the probe was Citigroup Inc. that also agreed yesterday to buy back or help clients unload similar amount of securities.

It was followed by Merrill Lynch & Co., whose clients were also heavily invested in auction-rate preferred shares, decided to reimburse customers at full-value.

The European bank hardest hit by the U.S. subprime contagion reached a settlement with state and federal regulators to purchase the securities from investors who bought them before the market's collapse in February.

The firm will also be paying $150 million in penalties to settle charges that it made misrepresentations in its marketing and sales of securities.

The company has scheduled a date, January 1, to buy back all the auction-rate securities from every investors, charities and small to mid-sized businesses.

UBS will reimburse customers at full-value, which means it will consume their clients' losses, of $11 billion in securities from individual investors this year and over $7 billion from institutions beginning in January, according to William F. Galvin, the top securities regulator in Massachusetts.

Auction-rate securities are preferred shares or bonds with interest rates that reset on a regular period, some times it is reset every week, in auctions managed by the brokerage firms similar to Citigroup that originally sold them.

The securities are issued by municipalities, student-loan companies, charitable organizations and others businesses and are long-term securities formulated to have short-term features.

In the preliminary settlement was announced by Securities and Exchange Commission and New York state officials, the firm said there are thousands of customers around the nation who have been unable to sell their securities since February 12.

On Thursday, New York Attorney General Cuomo said in the statement, "Today's settlement sends a resounding message to the entire auction-rate securities industry."

"This type of deceptive behavior will not be tolerated and we will actively seek justice on behalf of investors."

The market analysts indicated speculate that similar settlements related to auction rate securities matter may be followed by several similar settlements between the U.S. authorities and other major financial companies.