Seven senior executives at UBS cashed in $21m (£10.6m) of their personal holdings in auction-rate securities just before the market for these securities collapsed, leaving thousands of the Swiss financial giant's clients holding securities they could not sell.
The allegations are contained in a multibillion-dollar lawsuit launched yesterday by the New York attorney general, Andrew Cuomo, who succeeded the anti-Wall Street campaigner Eliot Spitzer in 2006. UBS vowed yesterday to fight the lawsuit.
Mr Cuomo's action means the collapse of the auction-rate securities market is shaping up to be the first major legal headache for Wall Street since the credit crisis began, and is potentially one of the biggest financial mis-selling scandals of the decade.
The unnamed executives included those serving on a working group that decided, on 13 February this year, that UBS would stop supporting the market for auction-rate securities. While they were able to get out, UBS customers are currently still holding $25bn in assets that they had previously been led to believe were the equivalent of cash, Mr Cuomo said.
"Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag," he said. "Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behaviour will not be tolerated."
An auction-rate security is a bond whose interest rate is not fixed, but set at a weekly or monthly auction, when existing holders can sell the bonds. For more than 20 years, Wall Street banks acted as "market-makers", stepping in to buy the bonds at auction if demand was weak, so that holders could cash out. But amid the spiralling credit crisis, they stopped acting as buyers of last resort and since then almost 60 per cent of auctions have failed.
UBS said it would "vigorously defend" itself. "It is frustrating that the New York attorney general has filed this complaint while we have been fully engaged in good-faith negotiations with his office to bring liquidity to our clients holding auction-rate securities," a spokesman said.
Mr Cuomo has subpoenaed other big players in the auction-rate securities market, which included Citigroup, Merrill Lynch and JPMorgan Chase, and he signalled other lawsuits could still be brought: "UBS is not alone in this scheme, there are other institutions which participated, but UBS is a major player."