UBS Seeks to Appease Clients With Auction-Rate Buy

By Christopher Condon

July 16 (Bloomberg) -- UBS AG, Switzerland's largest bank, plans to buy back as much as $3.5 billion of auction-rate preferred shares after being sued in the U.S. for fraudulently selling the securities as low-risk alternatives to cash.

Investors will be able to get their money back in full, the Zurich-based company said yesterday in a statement. The offer, the first by a broker, applies to shares issued by tax-exempt closed-end funds managed by firms such as BlackRock Inc. and Nuveen Investments Inc. It doesn't include auction-rate debt from municipalities or student-loan providers.

UBS was sued last month by Massachusetts Secretary of State William Galvin, who said investors were misled by brokers and financial advisers into believing the securities were as safe as cash while paying higher dividends. At least 15 lawsuits have been filed against securities firms on behalf of investors whose money was frozen when the auction-rate market collapsed in February amid fallout from the subprime-mortgage crisis.

``It's fabulous,'' Harry Newton, 66, an investor in New York who owns $3.5 million in auction-rate preferred securities, said in an interview. ``They were the worst of all the brokerage companies that sold this stuff.''

UBS said last month it will ``defend the specific allegations'' of Galvin's suit. UBS spokeswoman Rohini Pragasam declined to comment yesterday. Galvin couldn't be reached for comment.

Pressure on Banks

``Obviously this is constructive, but other steps remain and there is no timetable mentioned,'' David Chandler, 68, the lead plaintiff in a lawsuit against UBS, said in an interview from his home in San Diego.

The UBS announcement will put pressure on other brokers to make similar offers, said Joseph Witthohn, a research analyst for Janney Montgomery Scott LLC in Philadelphia.

``You can be sure they're going to get calls from clients asking if they're going to do the same thing,'' Witthohn said.

Auction-rate securities were bought by individuals and corporations in auctions run by dealers. Dividend rates were set every seven, 28 or 35 days, a feature promoted by the brokers as providing the ability to buy or sell quickly. As much as $218 billion of the $330 billion of auction-rate bonds and shares outstanding in February remains frozen.

UBS will finance the repurchases by reissuing the preferred shares in a private placement through a trust that will be consolidated on the bank's balance sheet. The reissued shares will carry a put option, guaranteeing the holder the right to sell, and will be marketed to money-market funds and other institutional investors.

Credit Losses

The bank, the hardest hit in Europe by the holdings in subprime mortgage-backed securities, has written down more than $38 billion in losses in the past three quarters, equal to more than two-thirds of equity it had at the end of June 2007. UBS didn't say how the buyback will affect earnings or capital.

The UBS plan is similar to those announced by the three largest U.S. closed-end fund companies. Chicago-based Nuveen, BlackRock in New York and Boston-based Eaton Vance Corp. intend to replace some outstanding preferred shares with new ones carrying a put option that they hope will attract capital from U.S. money-market funds, which control $3.5 trillion.

The bank said it received guidance from the U.S. Treasury and is in talks with the Securities and Exchange Commission over the planned reissue. The staff of the SEC has already approved the closed-end funds' proposals.

UBS said it hopes to begin making repurchase offers ``within 30 days of resolving these regulatory issues.''

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net