Same broker tied investors to UBS

Treasurers defend debt securities

For years, UBS broker Timothy P. Flynn has made a business of calling on small-town treasurers in western Massachusetts, where he grew up.

His office is on Park Avenue in Manhattan, but Flynn, 42, has spent much of his time in the city halls of Holyoke, Chicopee, and Belchertown. His Bay State customers stretch as far east as Winchester and down to Barnstable on the Cape. As one local treasurer put it, "He is UBS in Massachusetts."

But last week, UBS Financial Services Inc. said it would reimburse 19 towns and public clients - most of them Flynn's - for $37 million in investments that are barred under state law. In a settlement with Attorney General Martha Coakley, the Wall Street firm acknowledged those investments were not allowed for Massachusetts municipalities, which must keep cash in only the safest kinds of accounts.

Flynn did not respond to interview requests. Asked whether he would be disciplined as a result of the attorney general's decision, UBS declined to comment.

Many of the treasurers who bought the investments, called auction-rate securities, defended their decisions to do so. The investments were in a type of highly rated bonds that seemed perfectly safe, they said - until the market for trading them evaporated in February. And most came to Flynn's defense, say ing they didn't believe he had intentionally misled them.

"Tim is a guy that works closely with us. I talk to him at least twice a week," said Chicopee's longtime treasurer, Ernest Laflamme Jr. An elected treasurer, Laflamme, 77, has been handling the funds for his native city since 1970. Today, he oversees a budget of $150 million. He looked to Flynn, he said, to earn a bit of extra interest on a portion of the city's cash.

"I was looking for better rates for the city, naturally. Everybody does. I couldn't do it with CDs," Laflamme said. "I turned to Timmy, and we worked on this."

The result: In mid-2007, Laflamme invested nearly $6 million of the city's cash in student loan bonds that traded at frequent auctions run by UBS. The bonds performed as promised for a time, providing interest ranging from 6 to 11 percent, he said, well above the 3 percent certificates of deposit were paying by late last year.

But when the auctions stopped working in February, amid turmoil in the debt markets, it meant Flynn's clients couldn't get out of their investments. Under Massachusetts law, communities are supposed to keep cash in highly liquid accounts, like bank accounts and US Treasury bills, so their money is readily available.

Virtually all of the securities involved in the attorney general's UBS settlement were student loan bonds. They were sold over a period of two years, according to Coakley's office. But many of them, the Globe found, were sold toward the end of 2007 - shortly before the auction-rate market imploded. UBS last week said it was leaving the municipal bond market.

None of the communities involved in the agreement ran into an urgent cash crunch as a result of the investments, but some had to tap alternate accounts to free up funds.

A number of treasurers seem to have understood the risks of auction-rate securities and avoided them.

Jeffrey Cannon, treasurer of Millis, said he has known and done business with Flynn for several years and thinks highly of him. The UBS broker offered him auction-rate securities last November, Cannon said, but he declined after reading the marketing materials Flynn sent. Those brochures, copies of which were reviewed by the Globe, detailed in dense type the risks of the investments, including the possibility of failed auctions.

It's the job of treasurers to check the details. But those who didn't could easily have been confused: UBS labeled the securities "cash management" products.

There are no official qualifications to hold the office of treasurer in Massachusetts towns and cities. But in places where treasurers are appointed, rather than elected, the bar is generally higher, said Nancy Holt, president of the Massachusetts Collectors and Treasurers Association. An appointed treasurer, she said, typically has a college degree, along with accounting or finance experience.

But regardless of their background, in most towns and cities, the treasurer has sole control over investments.

In Holyoke, Flynn has been doing business with city hall, the Holyoke Gas & Electric Department, and the retirement board. As part of the attorney general's agreement, UBS will buy back about $2 million worth of securities from the Gas & Electric Department and about $1.2 million from the retirement board.

But Holyoke Treasurer David Donoghue, who oversees the gas and electric department funds, doesn't blame Flynn for the auction-rate trouble.

"We weren't coerced," Donoghue said. "This is somewhat of an overreaction here, to be quite honest. Over the years, the city has had a good relationship with the broker here and the returns have been very good."

James Lavelle, manager of Holyoke Gas & Electric, said the utility invested in auction-rate securities after consulting with Donoghue and getting board approval. He said they knew there would be some risk involved, since the returns were higher than those of other options. Ultimately, they went with Flynn's advice, he said: "We rely on the experts."

Beth Healy can be reached at bhealy@globe.com.