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 bank's securities unit gave hedge-fund managers below- market rent and low-interest personal loans to increase their business, according to a complaint today from the office of William Galvin, the secretary of the commonwealth. Personal loans made last year to managers of one Boston hedge fund had to be approved by investment-banking head Huw Jenkins in London, who urged UBS executives not ``to make a habit'' of exceeding limits for such loans, according to an e-mail included in the complaint.

UBS trails U.S. securities firms Goldman Sachs Group Inc. and Morgan Stanley in the running for about $8 billion in prime brokerage fees earned each year from hedge funds, according to Celent LLC, a Boston-based research and consulting firm. Federal regulations generally govern such relationships. The favors from UBS created conflicts of interest for fund managers that may have hurt their clients, the Massachusetts complaint says.

``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 Zurich-based 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 and federal laws governing securities dealers.

Galvin, the state's top securities regulator, 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 today.

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

Boston Office Space

Hedge-fund firms that had discounted rent in UBS-owned ``high-end office space'' in Boston's financial district in 2006 included Feingold O'Keeffe Capital LLC, Delta Partners LLC and Par Capital Management Inc., according to the Massachusetts complaint. The building in question at One International Place has a waterfall and full-sized trees in its courtyard.

UBS at times failed to process hedge-fund accounts correctly and discounted their rent rather than compensate the investment firms, according to Galvin's complaint.

E-mails and calls to executives of the three hedge-fund firms were not returned.

Rent discounts and other services UBS provides to ``favored clients'' benefit the managers but not their clients, Galvin's office argued in the filing. UBS executives including Jenkins approved $5 million in personal loans in June 2006 to Par Capital principals, exceeding lending limits because of ``the importance of the relationship'' to UBS, according to an e-mail included in the complaint.

Baseball Tickets

``Approved,'' Jenkins said in an e-mail, according to the filing. ``I would not like us to make a habit of this and that should be communicated.''

Par Capital didn't disclose loans as required by law, according to Galvin's complaint. Collateral for the loans was holdings in Par funds, it says.

Other perks for the funds included meals, drinks and tickets to games between the Boston Red Sox and New York Yankees baseball teams, according to the complaint.

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.

``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.''

Quid Quo Pro

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 20:25 EDT