Massachusetts sues UBS over auction-rate securities

Investors who are trapped in so-called auction-rate securities found a friend today in Massachusetts Secretary of State William Galvin: He sued brokerage UBS for fraud relating to the firm’s sale of the securities in the Bay State. Read the complaint here.

From Bloomberg: "We want complete rescission and restitution for all investors in Massachusetts," said Galvin, who estimated that UBS sold at least $190 million of the auction-rate securities to 237 investors in the state. "We think the conduct on the part of UBS was totally unacceptable."

Auction-rate securities are a form of debt issued by many municipalities and closed-end mutual funds in recent years. They are, in effect, long-term bonds masquerading as short-term debt. The interest rate they paid typically was reset at weekly or monthly auctions.

Brokers often pitched the securities as equivalent to money market funds, but with higher yields. As the credit crunch worsened this year, however, many investors have pulled back from complex debt issues. As auction-rate issues failed to attract new buyers at their weekly or monthly rate resets, most current owners of the $300-billion-plus in securities were told they were stuck with them.

Some issuers have been able to refinance the securities in the last month or so. Nuveen Investments today announced plans for the refunding of some of its municipal bond mutual funds' auction-rate issues. But many investors will remain trapped in the securities at Nuveen funds and elsewhere.

Also from Bloomberg: Karina Byrne, a spokeswoman for UBS in New York, said the firm was "disappointed" with Galvin’s complaint and "will defend the specific allegations."

A good place for investors to stay updated on the auction-rate mess is here. For more on what the states are doing to help investors, look here.

Oil threat remains as markets reopen, but rice gets cheaper

A few items of note as U.S. markets reopen today after the holiday weekend:

--Has oil just greased the skids for stocks? Record crude prices had Wall Street reeling last week, and it's hard to imagine equity buyers finding their footing this week unless the oil price gusher shows signs of easing, at around $132 a barrel here.

Phil Roth, technical market analyst at Miller, Tabak & Co. in New York, says that $130-plus oil just deepens the underlying fear investors have about jumping into stocks: the feeling that the U.S. consumer is tapped out, leaving little hope for an economic rebound in the near term and therefore threatening the expected second-half recovery in corporate earnings.

"This is not only about oil," Roth says. "That's the trap. We're in an economic slowdown, and the consumer is in a box because he can't spend his home equity anymore."

--Maybe oil will take a hint from the rice market? Bloomberg reports here that surging rice prices have suddenly reversed as some key producers, including Cambodia, indicate they'll ease export bans to boost global supplies. Vietnam, the world's second-largest rice exporter, also may soon lift a ban on new overseas shipments, according to Bloomberg.

--No justice for investors trapped in auction-rate securities? The credit crunch has left thousands of investors stranded in so-called auction-rate issues, long touted by brokers as a money market substitute. But suing for damages via class-action cases may be a bust, Bloomberg reports, in part because investors still are earning interest on their money even if they can't cash out. Full story here.

SEC seeking info on auction-rate debt sales

More on regulators' probes into so-called auction-rate debt, which have caused misery for thousands of investors who have become trapped in the securities amid the credit crunch: Bloomberg News reports today that the Securities and Exchange Commission wants brokerages to hand over more details about how the bonds were pitched to investors.

"We are looking at representations made to investors when they purchased auction-rate securities," Lori Richards, head of the SEC’s Office of Compliance Inspections and Examinations, told Bloomberg.

The SEC’s inspections office sent letters to the biggest sellers of auction-rate debt this month seeking the names of customers who purchased the notes and the identities of brokers who sold them, Bloomberg reports.

On Thursday the North American Securities Administrators Assn. said nine states were coordinating their probes of the $330-billion auction-rate market. And New York Atty. Gen. Andrew Cuomo was reported to have subpoenaed 18 banks and brokerages about their involvement in the securities. For more on the states' efforts check out this earlier post.

Posted April 18, 2008

States ramp up probes of auction-rate debt mess

Good news for investors trapped in so-called auction-rate securities: State regulators are feeling your pain.

The North American Securities Administrators Assn. today said regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington were coordinating their probes of the $330-billion market. And late in the day New York Atty. Gen. Andrew Cuomo was reported to have subpoenaed 18 banks and brokerages about their involvement in the securities.

Auction-rate securities are a form of debt issued by many municipalities and closed-end mutual funds in recent years. They are, in effect, long-term bonds masquerading as short-term debt. The interest rate they pay typically is reset at weekly or monthly auctions.

Brokers often pitched the securities as equivalent to money market funds, but with higher yields. As the credit crunch worsened this year, however, many investors have pulled back from complex debt issues. As auction-rate issues have failed to attract new buyers at their weekly or monthly rate resets, most current owners of the securities have been told they’re stuck with them.

That has left thousands of investors unable to get their cash back, because brokerages have refused to buy the securities from their clients, and only a small number of municipal and fund issuers of the debt so far have been willing or able to retire the securities via refinancing. To say investors are infuriated is putting it mildly.

NASAA said the state probes centered on sales practices and supervisory issues related to auction-rate issues. "Our focus is to determine what conduct took place at the point of sale -- what was potentially misrepresented and omitted -- and our goal is securing for investors access to their cash as requested," said Karen Tyler, NASAA president and securities commissioner of North Dakota.

"If the product was represented to be a cash equivalent going in, it must be treated as a cash equivalent coming out," she said.

Photo: New York State Atty. Gen. Andrew Cuomo/Associated Press