UBS: Auction-Rates Securities Collapse

Ever since the auction-rate securities mess erupted six months ago, the same story has echoed across Wall Street. The way UBS (UBS) and other banks tell it, the $330 billion market functioned for years without a hitch, providing big corporations and wealthy investors with a highly liquid alternative to cash. Then, without warning, it imploded in February, leaving tens of thousands of investors with huge losses if they tapped their accounts—assuming they could get the money at all.

But a analysis, based on court documents and interviews with regulators, investors, and financial advisers, reveals that there were serious flaws in the market long before it seized up. Last summer's credit crunch, which scared off investors from all manner of debt, only exacerbated the problems. There could be legal consequences for UBS, which is being sued for fraud by regulators in Massachusetts and New York. UBS, one of the biggest underwriters of the securities, says the cases are without merit and that e-mails cited in the suits are taken out of context. (On July 30, UBS settled a separate investigation by the Massachusetts Attorney General into sales of the securities to the state's municipalities.)