UBS settles student loan suit for $20m

UBS Securities Inc. will pay the organization that once issued nearly all of New Hampshire’s student loans $20 million, as part of the state Securities Regulation Bureau’s largest securities fraud settlement to date. UBS also agreed to reimburse the bureau $750,000 in expenses. The Swiss-based investment brokerage firm agreed to pay the New Hampshire Higher Education Loan Corp. the money in order to settle charges that it didn’t inform the nonprofit student loan organization that the bond market it depended on was about to collapse, even though it was thinking pulling out of it in the fall of 2007.When that auction rate securities market froze in February 2008, NHHELCO didn’t have access to capital and couldn’t make many loans, forcing the organization, colleges and students to scramble for replacement financing.”UBS didn’t fulfill its fiduciary duty,” said Mark Connelly, director of the Securities Bureau. “It impacted the ability to put out student loans.”UBS and NHHELCO were not saying much.”We are pleased to have concluded this matter with the New Hampshire Bureau of Securities Regulation as UBS continues its efforts to address the unprecedented industry-wide collapse of the auction rate securities market,” said the company in a prepared statement.”We would like to thank Mark Connelly and the staff at the Securities Bureau for their hard work,” NHHELCO President and CEO René A. Drouin said. “We support the bureau and we are pleased at the outcome.”The money comes at a crucial time for NHHELCO, which once issued 80 percent of student loans in the state, but will stop issuing any in June, thanks to a federal decision to “cut out the middleman.” Drouin opposed that decision, saying that previous attempts at direct lending failed, but he declined to estimate its financial impact on NHHELCO. Nor would he comment on where the $20 million dollars would go and what it would mean to the organization.This is not the first Securities Regulation Bureau action against UBS concerning auction rate securities, a way for institutions like NHHELCO to borrow money from investors that promised higher returns than the traditional fixed rate bond, making it easier for institutions to borrow money.These are bonds that are reset at frequent auctions that assume a greater number of buyers than sellers. But in 2007 as credit markets started to tighten, buyers started to pull out, resulting in more auction failures, where sellers outnumbered buyers. In February 2008, the market collapsed completely.Investors complained all over the country. In April 2008, New Hampshire was part of a global settlement in which UBS paid $22.1 billion to repurchase auction rate securities from damaged investors or provide liquidity to the market. In addition, UBS paid $150 million in fines.But this was the first and thus far only action on behalf of the institution. NHHELCO had borrowed virtually all of its $1.5 billion in order loan out to students. UBS, however, was considering pulling out of the auction rate securities market, “cherry picking” institutions to leave the market.One e-mail said UBS was “killing” the market, according to the Securities Bureau filing.But UBS didn’t choose to tell NHHELCO, the Securities Bureau charged. Instead it suggested UBS increase its interest rate in order to keep it in the market. But that only meant that if the market did collapse, NHHELCO would be in a more vulnerable position, the bureau alleges.”We are the only state to take action on the non-retail issuer,” said Connelly.Securities regulars usually focus on protecting the investor, and not the institution that they are investing in, he said. But Connelly said the bureau pursued this action, since it affected thousands of students in the state.The settlement would be more than twice the size as the previous largest bureau single settlement, which was against Amerprise Financial for $7.4 million in 2005 for failing to disclose conflicts of interest. — BOB SANDERS/NEW HAMPSHIRE BUSINESS REVIEW

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