June 27 (Bloomberg) -- UBS AG, Europe's largest bank by assets, was accused by Massachusetts regulators of ``dishonest and unethical'' practices in dealings with hedge-fund advisers.

The Zurich-based bank's investment-banking division in Stamford, Connecticut gave hedge-fund managers below-market rent, low-interest personal loans and other benefits to retain and increase business, according to a complaint today from the office of William Galvin, the secretary of the commonwealth and its top securities regulator. The treatment created conflicts of interest for fund managers that may hurt their clients, the complaint says.

UBS trails U.S. securities firms Goldman Sachs Group Inc. and Morgan Stanley in the competition for about $8 billion in prime brokerage fees generated each year by hedge funds, according to Celent LLC, a Boston-based research and consulting firm. Federal regulation generally governs relationships between hedge funds and brokers.

``Brokers want their business, and they're willing to spend money to make money,'' said Jeffrey Blumberg, a partner in the Chicago-based investment-management practice of law firm Drinker Biddle & Reath LLP, which isn't involved in the case. ``What's surprising is that, assuming UBS complied with federal guidelines, Massachusetts thinks their rules somehow trump compliance at that level.''

Personal Favors

The complaint also charges UBS with failure to supervise its employees' giving of gifts and gratuities. The action, filed with the state's Securities Division, seeks a cease-and-desist order, a censure and an undisclosed administrative fine.

Doug Morris, a UBS spokesman in New York, declined to comment. The firm's investment-banking division, UBS Securities LLC, is accused of violating the Massachusetts Uniform Securities Act.

Galvin said in an interview in January that he was investigating relationships between other investment banks and hedge-fund clients, declining to offer specifics. Brian McNiff, a spokesman for Galvin's office, wouldn't disclose the current status of those probes.

``At this point, this is the only case we've brought,'' McNiff said.

The outcome of the Massachusetts complaint may hinge on what Galvin's office claims were personal financial favors to individuals at hedge-fund firms, said Seth Berenzweig, a lawyer with Arlington, Virginia-based Albo & Oblon, whose clients include private fund investors.

Quid Pro Quos

``It's one thing to provide institutional help at the company level and another thing to provide what regulators might see as a personal bribe,'' Berenzweig said. ``Massachusetts is going to argue that this is a subtle form of securities fraud if people are getting steered into investments with undisclosed conflicts of interest.''

UBS AG increased its share of prime-brokerage services provided to new hedge funds in Europe in 2006, gaining ground on Goldman Sachs and Morgan Stanley, according to a survey released in February by London-based magazine EuroHedge.

``Unbeknownst to the pension funds, university endowments, charitable foundations, institutional investors and individuals who invest in hedge funds, the gifts and gratuities for the hedge-fund advisers come with implicit and sometimes explicit quid pro quos,'' Galvin said in the complaint.

Prime brokers process trades and lend money as well as securities to hedge funds.

To contact the reporter on this story: Jenny Strasburg in New York at jstrasburg@bloomberg.net.

Last Updated: June 27, 2007 17:31 EDT