Aug. 4 (Bloomberg) -- UBS AG's top U.S. legal official, David Aufhauser, quit as New York Attorney General Andrew Cuomo investigates the bank's sale of auction-rate securities before the market collapsed in February.

Aufhauser, general counsel for the investment bank and Zurich-based UBS's businesses in the Americas, will remain an adviser to the company until Sept. 30, spokeswoman Sabine Woessner said today. She declined to give a reason for his departure. He didn't return a call to his office, and there was no response to a message left at a residential number in his name in Washington. An attorney for Aufhauser, 57, couldn't immediately be located.

Aufhauser, a former U.S. Treasury legal chief, is 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 executives allegedly sold $21 million in personal holdings of auction-rate securities while the company promoted the products to investors.

Firms including UBS abandoned their routine role as buyers of last resort for the instruments in mid-February, letting the $330 billion market collapse. The bank said July 24 it will ``vigorously defend'' itself against Cuomo's claims and declined to identify the seven executives.

`Poor Judgment'

``While UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals,'' the bank said that day. The company planned to evaluate ``appropriate disciplinary measures,'' it said.

Jim Odell and Mark Shelton will take over Aufhauser's responsibilities as co-general counsels for the Americas, while David Graham will act as general counsel of the investment bank, UBS said today in a memo confirmed by New York-based spokeswoman Rohini Pragasam.

As Treasury general counsel from March 2001 to November 2003, Aufhauser provided legal advice on banking, international finance, securities, taxation, trade and enforcement. He also served on the U.S. president's corporate fraud and abuse task force at the Department of Justice, as counsel to the President's Working Group on Financial Markets, the Federal Financing Bank and the Committee on Foreign Investments.

Cuomo's complaint against UBS, filed at state court in Manhattan, says Executive A e-mailed his personal financial adviser Dec. 14, saying ``I want to get out of ARCs,'' the same day he was e-mailed a copy of a message from UBS's chief risk officer to the company's CEO about a series of problems with the auction-rate market. By Dec. 21, he had sold all $250,000 of his auction-rate securities.

`Propriety' Questioned

Executive A repurchased the same securities on Feb. 12, after he questioned the ``propriety'' of another executive's trades in the debt, the complaint said. A day later, UBS stopped supporting its auctions.

The Wall Street Journal reported the link between Aufhauser and Executive A last week.

Auction-rate securities are long-term bonds or perpetual shares with interest rates adjusted typically every seven, 28 or 35 days through a dealer-run bidding process, providing them with the characteristics of money-market instruments. Firms historically supported the markets, without contractual obligation, until demand dried up.

`Aggressive Marketing'

Cuomo said in the lawsuit that UBS began an ``aggressive marketing'' campaign to sell auction-rate securities to investors as demand began to wane last year, forcing the bank to step in as a buyer at the auctions to prevent them from failing. The attorney general is seeking to force UBS to buy back at face value $25 billion in auction-rate securities held by the bank's customers nationwide.

Massachusetts and Texas have filed related complaints against UBS, also asking the company to repurchase securities it marketed.

UBS, which closed its municipal investment banking operations in May, was the second-biggest underwriter of municipal auction-rate securities behind Citigroup Inc., according to data from Thomson Reuters. It held more than $11 billion of the debt on its books when the market collapsed, the bank has said.

Cuomo's lawsuit is People of the State of New York v. UBS Securities LLC, New York state Supreme Court (Manhattan).

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Karen Freifeld in New York State Supreme Court at kfreifeld@bloomberg.net.

Last Updated: August 4, 2008 16:09 EDT