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UBS Auction Rate Security Holders Don't Get More Relief, Judge Says

Posted by: Aaron Pressman on March 31, 2009

You remember the whole auction rate securities mess? These long-term bonds and shares of preferred stock were sold as cash-equivalent, short-term investments because their interest rates were reset at weekly or monthly auctions. The whole jig blew up last February, when it turned out that the “auctions” were a figment of Wall Street’s imagination and the market froze solid. UBS was one of the leading auction agents and had zillions of furious customers after the ARS market crashed (refresh your memory here).

Well, regulators came to the rescue, at least for UBS’s own customers, forcing the bank to buy back most of the securities at the original issue price. That wasn’t enough for some customers like David and Shelly Chandler. They filed suit against UBS, alleging that the ARS system was rigged and they’d been bilked out of substantial interest payments they would have received if the market had been run with full disclosure and fair auctions.

Federal District Judge Lawrence McKenna isn’t going along. In an order issued yesterday, the judge dismissed the class action againt UBS filed by the Chandlers and other ARS investors. Under current law, the investors had a choice: seek damages for all they’d lost or — big or — agree to the settlement from UBS buying back their securities. The buyback settlement in essence rescinded the entire transaction, according to Judge McKenna. UBS gave the investors back what they paid for the securities so it’s as if the whole deal never happened and no more damages can be awarded, the judge ruled.

What about those many folks who own securities with UBS-run auctions but who weren’t UBS customers directly? They weren’t covered by the forced buy-back settlement. Ah, but none of the lead plaintiffs in the class action were in that circumstance, notes Judge McKenna. So the lawsuit is dismissed. The question remains whether other groups of ARS investors, such as those who had only a portion of their securities repurchased or the aforementioned non-UBS customers, might get a little further.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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