Aug. 8 (Bloomberg) -- UBS AG, Switzerland's biggest bank, agreed to pay $150 million in fines and begin buying back $18.6 billion in failed auction-rate securities, the largest settlement in a U.S. probe into whether banks stuck clients with hard-to-sell bonds.

UBS will purchase $8.3 billion of the securities from its clients beginning on Oct. 31 under a settlement with New York State Attorney General Andrew Cuomo, the Securities and Exchange Commission, and a group of other state regulators, according to terms of the settlement announced today. The bank must also help its institutional clients sell an additional $10.3 billion in securities, and may have to buy back the bonds if they fail to find a market, Cuomo said.

The agreement is the second in two days, covering 80,000 individual investors who will get back more than $15 billion, Cuomo said. Citigroup Inc. settled state and federal claims yesterday, agreeing to buy $7.3 billion of the debt from individual investors and pay $100 million in fines, as well as pledging to help 2,600 institutional customers unload $12 billion of securities.

``The industry is beginning to take responsibility for correcting a problem they created, and that's a good thing,'' Cuomo said in a statement. ``The fundamental goal has been to return money into the hands of investors, and that's what this deal has done.

Settlement Costs

UBS said the full cost of the settlement, including the fines and writedowns of auction-rate debt it will redeem, is estimated at $900 million on a pre-tax basis, which will be recognized in second-quarter earnings. The bank fell 53 percent in the year through yesterday in Swiss trading. The stock rose 1.3 percent to 22 francs as of 3:49 p.m. New York time.

The decision by UBS and other investment banks to abandon the auction-rate market may in the end compound their losses from the global credit-market contraction as they face fines and are forced to repurchase securities they sold. 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.

Bank of America Corp. analyst Jeffrey Rosenberg estimates banks that purchase the auction-rate debt may have to write it down by a total of $4 billion.

Multiple Complaints

Regulators in Massachusetts, New York and Texas filed civil complaints against UBS, claiming it pressured financial advisers to sell the securities as the $330 billion market faltered. Investors were left unable to redeem securities that were billed as equivalent to cash after the dealers that ran the periodic bidding to determine interest costs in February suddenly stopped supporting the market as they had for years.

Merrill Lynch & Co., which was sued by Massachusetts Secretary of State William Galvin, 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.

Cuomo refused to rule out further complaints against individuals at the banks that have settled. UBS 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.

`Executive A'

Aufhauser, a former U.S. Treasury legal chief, was among seven unidentified executives mentioned by Cuomo in his July 24 complaint, referring to him only as ``Executive A,'' two people familiar with the case said. The Swiss bank placed U.S. fixed- income chief David Shulman, identified by name in Galvin's complaint as an executive who sold his own holdings of the securities as the market faltered, on administrative leave, spokeswoman Karina Byrne said this week.

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.

No-Cost Loans

The bank will begin offering some of its clients no-cost loans next month, and begin redeeming auction-rate securities for investors with less than $1 million of the debt on Oct. 31, according to the settlement. It customers will have until Jan. 1, 2011 to redeem their auction-rate debt.

UBS said it will begin redeeming the securities held by its institutional clients in June 2010 if it is unable to help liquidate their holdings, according to a statement it released today. The bank also agreed to reimburse it municipal clients in New York that have refinanced auction-rate securities sold since last August.

``Today's solution provides further relief, beginning in September, to investors who have been understandably frustrated by the industry-wide failure of the ARS market,'' said Marten Hoekstra, head of UBS Wealth Management Americas, in a statement.

UBS said on July 16, prior to the settlement, it planned to offer to buy back as much as $3.5 billion in auction-rate preferred shares it sold for closed-end funds. This is in addition to the $18.6 billion it agreed to begin redeeming today.

Bank of America

The Massachusetts Secretary of State is still probing Bank of America, 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. Cuomo said he is still investigating all the institutions involved in the market.

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 16:24 EDT