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UBS says it was 'honest' in selling auction securities

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Bloomberg News / July 26, 2008

UBS AG said it was "honest and ethical" in its marketing of auction rate securities, according to the Zurich-based bank's reply to a lawsuit filed last month by Massachusetts Secretary of State William F. Galvin accusing it of fraud.

UBS, the second-largest underwriter of municipal auction rate securities in the United States after Citigroup Inc., said it had grounds to believe the auction rate bonds it sold "were suitable for clients."

It also said in its reply that it has "taken substantial measures" to help investors trapped since the auction rate market collapsed in February and to assist issuers restructuring the debt.

"Contrary to the allegations, UBS is committed to serving the best interests of its clients," the bank said in the filing dated July 17, obtained yesterday from Galvin's office.

State and federal regulators began probing Wall Street's marketing of auction rate securities after investment banks abandoned the $330 billion market, permitting thousands of auctions to fail and leaving investors unable to sell the debt.

Municipalities, closed-end funds, and student loan organizations sold the long-term bonds, and the banks ran the auctions where the interest rates were reset every week or month.

In addition to individuals, at least 435 publicly traded companies hold the securities, with 247 of them writing down the value of their holdings since the market collapsed, resulting in losses of $2.18 billion, according to a survey by Pluris Valuation Advisors LLC in New York.

Regulators in Massachusetts, New York, and Texas filed formal complaints against UBS, demanding the bank offer to buy back at face value the securities it sold. Galvin is still investigating Merrill Lynch & Co. and Bank of America Corp.

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