UBS seals $19.4bn settlement with US regulators

UBS, the Swiss broker, has agreed to spend $19.4bn (£10.1bn) to buy back auction rate securities from clients who have been left holding these impossible-to-sell investments since the market collapsed in February.

The company will also pay $150m to settle allegations that they duped their clients into buying the securities by pretending they were the equivalent of cash.

The agreement comes hot on the heels of settlements by Citigroup and Merrill Lynch, which have promised buy-backs totalling $7.5bn and $17bn respectively. Citigroup said on Thursday that it would pay a $100m fine.

UBS was facing lawsuits from the attorneys-general in New York and Massachusetts, whose states will split the fine between them. William Galvin, the Massachusetts secretary of state, said that UBS stepped up its marketing of auction-rate securities to its clients after senior executives began to fear the $330bn market was failing. It was a "planned unloading of their inventory on unsuspecting investors," Mr Galvin said.

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.

The lawsuit filed by the New York attorney general, Andrew Cuomo, claimed that seven senior executives at UBS sold their own personal holdings of auction rate securities in the weeks before the bank abandoned support for the market. David Aufhauser, general counsel of its US investment bank, resigned last week after being named as one of the seven.

Marten Hoekstra, head of UBS wealth management in the Americas, said: "Today's solution provides further relief, beginning in September, to investors who have been understandably frustrated by the industry-wide failure of the ARS market."

Bank of New York Mellon and Bank of America have also been hit with subpoenas from regulators investigating the auction rate securities market.