Aug. 8 (Bloomberg) -- UBS AG, Switzerland's biggest bank, agreed to buy back $19.4 billion in auction-rate securities from clients and pay a $150 million fine to settle U.S. regulatory claims it improperly stuck customers with hard-to-sell bonds, according to Massachusetts Secretary of State William Galvin.

UBS will repurchase the securities from clients under a settlement with New York State Attorney General Andrew Cuomo, the U.S. Securities and Exchange Commission and a group of state regulators, said Brian McNiff, a spokesman for Galvin. The bank follows Citigroup Inc. and Merrill Lynch & Co. in yielding to regulatory pressure that they make investors whole.

The settlement tops a regulatory accord with Citigroup, which agreed yesterday to buy back about $7.5 billion in auction-rate securities from individuals, charities and small businesses, and pay a $100 million fine, the SEC said. Citigroup also agreed to help 2,600 institutions holding about $12 billion of the instruments trade their debt.

Merrill said yesterday it would voluntarily start repurchasing as much as about $10 billion of the securities in January. The bank hasn't reached a settlement with regulators, who said they are continuing their probe.

``There is no way for the institutions to win this fight, and they know that,'' Thomas Ajamie, a securities lawyer in Houston, who represents investors and won a $429 million arbitration award against Paine Webber Group in 2001.

States including Massachusetts had already filed civil complaints against UBS, claiming it pressured financial advisers to sell the securities before the $330 billion market collapsed in February. Investors were left unable to sell securities that UBS and other brokerages said were equivalent to cash when dealers that ran the periodic bidding to determine interest costs suddenly stopped supporting the market as they had for years.

Preferred Buyback

UBS said on July 16 it planned to offer to buy back as much as $3.5 billion in auction-rate preferred shares it sold for closed-end funds. Cuomo said in his complaint against the bank last month that its customers in the U.S. held a total of $25 billion of the securities.

The decision by investment banks to abandon the auction- rate market in February may in the end compound their losses from the global credit-market contraction as they face fines and are forced to buy securities back from their customers. Zurich- based UBS reported a net loss of 25.4 billion Swiss francs ($25.6 billion) in the nine months through March, more than any other bank. UBS fell 53 percent in the year through yesterday in Swiss trading. The stock rose 1.3 percent to 22.02 francs as of 4:16 p.m. Swiss time.

The bank may have to take a writedown of about $1 billion if it buys back about $20 billion in auction-rate securities, said Kian Abouhossein, a London-based analyst at JPMorgan Chase & Co. That would increase the estimate for UBS writedowns still to come this year to about 9.4 billion francs, with as much as 5 billion francs in markdowns forecast for the second quarter, according to Abouhossein.

Personal Sales

UBS and the other banks knew the market was failing in the months prior to abandoning the auctions, according to Galvin, who cited e-mails and other evidence. They ratcheted up marketing, targeting individual investors with securities that were billed as cash equivalents, the regulators charged.

Bank executives allegedly sold $21 million in personal holdings of auction-rate securities while the company promoted the products to investors, regulators said. One of them, UBS's top U.S. legal official David Aufhauser, quit earlier this month.

Aufhauser, a former U.S. Treasury legal chief, was among seven unidentified executives mentioned by Cuomo in a lawsuit against UBS on July 24, which refers to him only as ``Executive A,'' two people familiar with the case said. The Wall Street Journal last month reported the Swiss bank suspended U.S. fixed- income chief David Shulman. The bank confirmed it placed an employee on administrative leave, without identifying the person.

Tax-Evasion Probe

Separately, UBS has said it's cooperating with a tax- evasion probe by U.S. prosecutors. The bank hid as much as $17.9 billion for 19,000 Americans who didn't declare assets to the Internal Revenue Service, according to a Senate subcommittee report. Last month, UBS said it will stop offering offshore- banking services to U.S. clients through branches not licensed in the U.S.

The Massachusetts Secretary of State is still probing Bank of America Corp., which disclosed in a regulatory filing yesterday that it received subpoenas and requests for information from various state and federal governmental agencies regarding auction-rate securities, saying it is cooperating fully with those requests.

One of the higher costs UBS faces is liquidating securities sold by student loan organizations, according to Joseph Fichera, chief executive officer of Saber Partners LLC. Less than $3 billion in student loan auction-rate debt has been refinanced, a fraction compared with the municipal and closed-end funds, which often faced higher penalty rates when the market collapsed.

``They were big in the student loans,'' said Fichera, a former investment banker based in New York. ``That's a more problematic issue.''

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net; Karen Freifeld in New York State Supreme Court at kfreifeld@bloomberg.net.

Last Updated: August 8, 2008 10:32 EDT