Regulators accuse UBS of defrauding US student lender

15 August 2008

CONCORD – New Hampshire securities regulators on Thursday accused Swiss banking giant UBS of defrauding the state’s leading issuer of student loans.

In a civil complaint, the Bureau of Securities Regulation said UBS Securities LLC knew the auction-rate securities market was on the verge of collapse in February, but was "actively encouraging" the lender to sell more of the bonds.

"Our investigation revealed that UBS had knowledge that a market collapse was looming but did not disclose that information to (the lender)," said Jeff Spill, the bureau’s deputy director.

UBS had no immediate response but said it was preparing a statement.

Last week, parent company UBS AG announced a big settlement to help investors who bought auction-rate securities. Bureau Director Mark Connolly applauded the settlement, but said it did little or nothing to help lenders such as the New Hampshire Higher Education Loan Corp or the thousands of students who rely on them.

UBS Securities, UBS’ investment banking branch, has been the longtime financial adviser and underwriter to NHHELCO.

Student-loan issuers in other states also relied on the auction-rate market and have been similarly affected, Connolly said.

Because of the market collapse, NHHELCO had to shut down two loan programs in March affecting about 6,000 students. Last week, it asked UBS for a line of credit so it could get loans flowing normally again.

NHHELCO President Rene Drouin said his company handles 80 percent to 85 percent of the student loans in the state, USD 250 million (CHF 274.8 million) worth annually in the past. Using other banks and credit unions, it has continued handling federal student loans totalling about USD 90 million.

Student-loan issuers such as NHHELCO and municipal agencies were major issuers of auction-rate securities, whose rates were reset at frequent auctions. Big banks stopped supporting the auctions as part of the broader credit crisis last winter.

[AP / Expatica]