Auction rate arbitration against UBS may proceed: judge

Tue Feb 12, 2013 1:44pm EST
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By Nate Raymond

NEW YORK (Reuters) - UBS AG UBSN.VX (UBS.N: Quote) has lost a bid to block a securities arbitration by a Minnesota healthcare organization asserting claims arising out of $125 million in auction-rate securities it issued in 2007.

The ruling by U.S. District Judge Michael Davis in Minneapolis on Monday marked the latest decision in a series of disputes over who constitutes a "customer" for securities arbitration before the Financial Industry Regulatory Authority.

Davis found Allina Health System was a customer, despite the bank's arguments that auction-rate securities issuers are not customers of underwriters under the rules of FINRA, the financial industry's self-regulator that runs the arbitration forum to settle disputes between broker dealers and customers.

Auction-rate securities are a type of bond in which investors place bids that determine interest rates.

A spokeswoman for UBS did not respond to a request for comment.

Allina, a not-for-profit health-care system, commenced the arbitration in February 2012, in a case arising out of auction-rate securities it issued in October 2007 as part of an issuance of $475 million in bonds to refinance debt and to finance remodeling and renovations.

UBS was the underwriter of the auction-rate securities issued by Allina.

In February 2008, as the financial crisis gained steam, the auction-rate securities market collapsed as auctions failed. Allina contended the market collapsed due to a decision by UBS and other banks to stop submitting support bids to prevent auction failures.   Continued...

The offices of Swiss bank UBS are seen in New York December 19, 2012. REUTERS/Andrew Burton