For Immediate Release - July 30, 2008

Attorney General Martha Coakley Announces Payment to Commonwealth by UBS Financial Services

UBS, having repaid Auction Rate Security investment funds to 17 municipalities, will pay $1,000,000 to the state

BOSTON - Today, Attorney General Martha Coakley’s Office announced investment bank and financial services firm UBS will make a payment to the Commonwealth of $1,000,000 relating to UBS’ sales of auction rate securities to certain Massachusetts towns and cities.  In February 2008, the Attorney General’s Office began investigating allegations that UBS Financial Services, Inc., and UBS Securities, LLC, misled government entities regarding whether auction rate securities were a permissible investment for them under Massachusetts Law.  UBS has agreed to entry of a consent judgment in Superior Court, and will make a payment to Massachusetts.  As stated in the proposed consent judgment, the monies will consist of a $750,000 payment to the Commonwealth of Massachusetts, including for fees and costs, and an additional $250,000 payment to be used to provide support for cities and towns with respect to their investments.  Such funds will be used by the Attorney General’s Office for education, training and assistance for treasurers and other financial officials of cities and towns with respect to appropriate investments, investment management practices, and financial controls.  The Attorney General’s Office can also use the funds to develop guidelines for appropriate municipal investments and to help with review of city and town investment practices.  The judgment must still be approved by the Suffolk Superior Court.

“We are pleased with the results in this case,” said Attorney General Coakley.  “Our primary interest was to promptly return to these towns and cities the investment monies they placed with UBS.  However, another important goal was to find a way to prevent this from happening to towns and cities in the future.  The additional funds for town and city treasurer education and guidance will assist us in reaching this goal.” 

Today’s payment to the State follows an agreement in May 2008 between UBS and the Attorney General’s Office which led to the return of over $35 million in investments to seventeen Massachusetts towns and cities, as well as the Massachusetts Turnpike Authority.  Today, in connection with the Attorney General’s investigation, UBS agreed to also reimburse the remaining Massachusetts communities that had invested with UBS in auction rate securities.  The Attorney General’s investigation, which began in February 2008, related to whether certain UBS employees sold auction rate securities to towns, cities and state entities, and inaccurately represented that those investments were permissible under Massachusetts law.  This includes repayment to the towns of Norwood and Southborough and the cities of Fall River and Woburn, totaling approximately $3.4 million.

An auction rate security is a debt instrument, such as a bond, or preferred stock for which the interest rate or dividend is periodically reset through an auction mechanism.  In some instances, towns and cities were persuaded to invest their cash accounts into these auction rate security accounts.  Although these securities have long-term maturities of many years, they historically have been offered for sale at weekly or monthly auctions.  However, in early 2008, the market for auction rate securities dried up and the auctions through which they were sold experienced widespread failures.  When an auction fails, liquidity disappears from the market as it becomes difficult to dispose of such securities at all, let alone at par value.  Many such securities have been written down to reflect their reduced market value.  Auction rate security investments have been frozen since early this year due to lack of market liquidity, and the value of many of the municipal investments have been written down by UBS.

This matter was handled by Division Chief Glenn Kaplan and Assistant Attorneys General Owen Lefkon and Amy Markowitz of Attorney General Coakley’s Insurance and Financial Services Division.

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