UBS to buy back $3.5 bn of auction rate securities

NEW YORK: UBS AG on Tuesday said it will buy back up to $3.5 billion of auction-rate securities that froze up earlier this year when the market took a downturn.

The Swiss bank was sued for fraud by Massachusetts Secretary of State William Galvin. He accused UBS of pushing the sale of the instruments as cash-like investments, even after the market began to turn.

UBS said clients who hold auction-rate preferred shares issued by tax-exempt closed-end funds can get their money back in full plus any unpaid dividends. The Zurich-based bank will fund the repurchases by reissuing the preferred shares through a trust that will be consolidated on the bank's balance sheet.

To be eligible for this offer, the auction preferred stock must have been held in the clients UBS account on July 15, 2008.

Until last winter, the $330 billion auction-rate securities market had been seen by many investors as a safe. They were promoted by brokers as liquid investments because customers normally could get out of them every seven or 28 days. The interest rates on the debt reset at each of those auctions.

But starting in mid-February, the auctions failed to yield buyers, as investors sought to avoid risk amid turmoil in credit markets. The market's failure left many investors including local governments with their cash frozen as buyers dried up.