New York state officials have filed civil fraud charges against UBS, accusing the Swiss banking giant of marketing certain kinds of adjustable bonds as 'safe' investments.
State Attorney General Andrew Cuomo said the suit accuses UBS Securities and UBS Financial Services 'with falsely selling and marketing auction-rate securities as safe, highly liquid, and cash-equivalent securities.'
Cuomo said UBS customers 'are holding more than $25 billion in illiquid, long-term paper as a result of UBS's fraudulent misrepresentations and illegal conduct.'
According to the suit, UBS had advised clients that auction-rate securities, which are bonds in which the rate is set by auction, were similar to cash, just before the market for the instruments began to collapse last year.
'The representations were deceptive as the auction-rate securities market came under tremendous strain, leaving the securities with mounting liquidity risks that eventually blocked thousands of customers across New York and the nation from accessing their holdings,' a statement from Cuomo's office said.
The investigation into UBS also discovered that as the securities market started to collapse, the bank's top executives quickly sold off $21m in personal holdings even as the bank continued to market the securities to its consumers.
'Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag,' Cuomo said.
'Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behaviour will not be tolerated.'
UBS issued a statement this week saying that although it had found cases of poor judgement among its staff, it did not believe that any of them had broken the law.
The bank, which has made huge asset writedowns on exposure to the US subprime home-loan market, had already said that it would defend itself vigorously against the allegations.
UBS was already under suspicion in the US of having helped several thousand US clients to evade taxes.
