N.H. regulators say UBS misled student loan agency

New Hampshire regulators say they believe there is another type of victim in the auction-rate scandal: an issuer of the bonds that have ensnared investors since February.

In a lawsuit against UBS Financial Services Inc., the New Hampshire Bureau of Securities Regulation alleged today that the Swiss bank misled a nonprofit New Hampshire student loan agency about the auction-rate market. UBS violated its fiduciary duty to the lender, a longtime client, the bureau alleged, by encouraging it to continue to issue debt through the auction market when UBS knew the market was on the verge of collapse.

‘‘It’s very clear to us that UBS was managing its way out of this auction-rate market in a way that it was not fully informing their client about the risks and what consequences there could be to them in this failed market,’’ said Mark Connolly, director of the bureau.

UBS said it would vigorously defend itself against the lawsuit: ‘‘This complaint attempts to link a single client interaction with overall market conditions which affected all student loan issuers, and as such we believe there is no basis for these specific allegations.’’

The lender, the New Hampshire Higher Education Loan Corp., was warned about trouble in the market long before the investors in its bonds.

As previously detailed by the Globe, UBS told the loan group by mid-December last year that the auction-rate market was faltering. Its executives signed an agreement that took effect Dec. 17 to pay dramatically higher interest on its bonds in the event the market did fail in order to keep attracting investors. The agreement was disclosed in a memo to investors posted on the lender’s website.

René A. Drouin, the lender’s chief executive, said his group filed a complaint against UBS with New Hampshire securities officials within the past two weeks. UBS last week agreed to buy back $19 billion in auction-rate securities from investors, in a settlement with federal and state regulators. The latest New Hampshire action is separate from that settlement.

Auction-rate securities are a form of debt that student lenders and other nonprofits used to fund their operations because it was inexpensive. For years, rates were reset at weekly or monthly auctions, which drew investors looking for returns slightly better than money market funds. But on Feb. 13, auction markets all shut down, as trouble in the credit markets spooked investors and Wall Street’s giants all decided to stop supporting the trades.
(By Beth Healy, Globe staff)