July 24 (Bloomberg) -- UBS AG was sued today by New York Attorney General Andrew Cuomo, alleging the Zurich-based bank's promotion of auction-rate securities as safe, money market-like investments was fraudulent.

Cuomo seeks to force UBS to offer to buy back at face value $25 billion in auction-rate securities held by the bank's customers in New York and nationwide. Massachusetts and Texas have filed similar complaints against UBS since the $330 billion market collapsed in February in an effort to force the firm to repurchase securities it marketed in their respective states.

``We believe we have nationwide jurisdiction, and we're looking for recoveries nationwide,'' Cuomo said today at a press conference in New York announcing the suit. He said his investigation into UBS and other banks that sold auction-rate securities is continuing, and he declined to rule out additional complaints or criminal charges.

State and federal regulators have been probing Wall Street's sale of auction-rate securities since investment banks abandoned the market in February, permitting thousands of auctions to fail and leaving investors unable to sell the debt. Municipalities, closed-end funds and student loan organizations sold the long-term bonds, and the banks ran the auctions where the interest rates were reset every week or month.

Marketing Campaign

U.S. prosecutors and regulators are separately investigating allegations that UBS helped wealthy U.S. citizens conceal $20 billion in assets and evade income taxes. The company reported a net loss of 25.4 billion Swiss francs ($25.6 billion) in the nine months through March, more than any other bank hit by the global credit-market contraction.

``This is something I believe can be settled because they are not worthless; they are simply not liquid,'' said John Coffee, a Columbia Law School securities law professor in New York, regarding the auction-rate securities. The investigation of tax evasion is of ``an order of magnitude more serious to them,'' Coffee said.

Cuomo alleges in the lawsuit filed today that UBS began an ``aggressive marketing'' campaign to sell the 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. UBS continued selling the securities even as the market unraveled, with at least seven bank executives involved in the marketing campaign unloading $21 million in personal auction- rate holdings, the attorney general said.

UBS spokeswoman Karina Byrne in an e-mailed statement said the bank will ``vigorously defend'' itself against the allegations in the suit, and ``categorically rejects any claim that the firm engaged in a widespread campaign'' to shift auction-rate debt off its books and into client accounts.

`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 and are evaluating appropriate disciplinary measures for these individuals,'' Byrne said.

The bank on July 16 said it plans to offer to buy back as much as $3.5 billion in auction-rate preferred shares it sold for closed-end funds. Cuomo said today that the offer is insufficient and that it needs to buy back all the securities it sold.

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.

Investors' Holdings

Thousands of investors have been left stuck with securities that they thought were akin to money-market funds, facing losses if they attempt to sell their holdings in secondary markets, according to Barry Silbert, chief executive of Restricted Stock Partners in New York, which operates an exchange.

States and local governments have refunded or plan to replace at least $91.8 billion in auction-rate securities since the market's collapse in February sent borrowing costs as high as 20 percent, according to data compiled by Bloomberg News. Closed-end funds replaced $19.7 billion and student loan organizations less than $3 billion.

Cuomo's complaint echoes the findings in a lawsuit filed on June 26 by Massachusetts Secretary of State William Galvin that attempted to show through e-mails obtained from UBS that executives increased pressure on financial advisers at the company to sell the securities as demand from corporate cash managers waned. The suit alleges the company failed to warn investors that the securities might become illiquid, and instead continued to market them as cash equivalents.

Additional Investigations

Galvin is also investigating Bank of America Corp. and Merrill Lynch & Co. More than five states participated in a search of the securities division headquarters of Wachovia Corp. in St. Louis on July 17 as part of a coordinated auction-rate probe.

At least 12 state securities regulators are probing the collapse of the market, excluding New York, according to the North American Securities Administrators Association. The Texas State Securities Board this week filed a notice of hearing to suspend UBS's state license, claiming the bank engaged in fraud by marketing the long-term bonds as ``liquid investments.''

Regulators in New York, Massachusetts and Texas are also seeking damages against UBS for its sale of the securities. Cuomo's probe involves at least 18 different banks.

Arbitration Claims

The Securities and Exchange Commission and Financial Industry Regulatory Authority are also probing the banks. Investors have filed about 110 arbitration claims against their financial advisers related to auction-rate securities, according to Nancy Condon, a spokeswoman for Financial Industry Regulatory Authority.

UBS said in a recent securities filing that it has also been named in three class-action lawsuits related to the securities.

``Certainly the pressure is building,'' said Peter Henning, a former federal prosecutor and law professor at Wayne State University Law School in Detroit. ``They need to figure out a way to get the states and the SEC off its back, then it can just deal with the customers.''

The case is People of the State of New York v. UBS Securities LLC, New York state Supreme Court (Manhattan).

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: July 24, 2008 17:15 EDT