An arbitration panel ordered UBS to pay a small business in Maryland ten times the amount it lost as a result of its auction rate securities (ARS) holdings. The assets were frozen when Wall Street stopped supporting the ARS market and overnight investors who were told ARS’s were “cash equivalent,” found themselves without liquidity, or “oxygen” as the owner of the Maryland business described it.
As I stated in today’s Wall Street Journal, “This case sends a shot across the bow for Wall Street firms that if they violate securities laws, they can be held liable for consequential damages.”
The Maryland business asserted that because of UBS’ dubious sales practices, their business suffered significant damages. The business went from having 60 employees to 15 because of a lack of cash. Attempting to add insult to injury, UBS tried to argue that the business failed because of its management and not a lack of cash, but an arbitration panel didn’t buy it.
You may remember that David Aufhauser, UBS’s general counsel, was banned from the industry last year and ordered to pay a penalty to settle insider trading charges after he dumped his ARS holdings. He was the recipient of an internal company email warning of risk in the ARS market. Obviously, the Maryland business in this case and hundreds of other UBS customers weren’t afforded that same alert.
This is yet another example of UBS putting its own interest ahead of its customers. Fortunately, an arbitration panel made UBS pay dearly.