A lawsuit filed by an institutional investor that claims UBS AG lied about the safety of auction-rate securities it sold can move forward, a federal judge ruled on Wednesday.
Gary L. Sharpe, a U.S. district court judge in Albany, N.Y., denied UBS's motion to dismiss the case filed in June by Latham, N.Y.-based energy company Plug Power Inc.
A UBS spokesman said in a statement: "We are disappointed that this case wasn't dismissed today and we intend to vigorously defend ourselves in this action." He added that UBS has offered clients the ability to borrow up to 100% against their auction-rate holdings.
The case is being widely watched by institutional investors holding billions of dollars worth of auction-rate securities they can't easily sell. Such civil cases are the hope of institutional investors, who, unlike small businesses and individuals, weren't the beneficiaries of agreements by numerous financial institutions to buy back many of the securities they sold. The agreements were part of settled fraud allegations brought by state securities regulators.
The market for auction-rate securities, once as large as $330 billion, froze in February amid the credit crunch, as buyers for the securities disappeared. Auction-rate securities let issuers borrow for the long term, but at lower, short-term interest rates. The interest rates reset at periodic auctions, thus the name.
The case is proceeding despite a settlement between UBS and the New York attorney general's office and other regulators, in which the firm agreed to buy back $19 billion of securities from its clients. In the UBS settlement, securities held by institutional clients are expected to be bought back by 2010, but "we need the funds before 2010, and they're not providing us a [guarantee] that they will be able to pay us in 2010," said Greg Carpinello, a lawyer at Boies, Schiller & Flexner LLP, which is representing the plaintiff.
The UBS case is unusual because most of the legal action against financial firms by auction-rate investors has occurred through arbitration claims rather than complaints filed in court.
In its suit, Plug Power claims UBS assured Plug Power's chief financial officer that auction-rate securities backed by student loans were safe and liquid, despite spikes in their interest rates that suggested otherwise. The company had bought $62.9 million in auction-rate securities backed by pools of student loans starting in 2005, and the securities made up nearly half of its total investment portfolio, according to the complaint.