In re UBS Auction Rate Securities Litigation

UBS AG, UBS Financial Services, Inc., and UBS Securities LLC (collectively, UBS) (defendants) underwrote and served as the auction dealer for large volumes of auction-rate securities (ARS). ARS were variable-rate equity or debt instruments that paid a fluctuating amount of interest or dividends based on periodic auctions. The auctions, which also determined ownership of the ARS, were typically conducted every seven, 28, 35, or 49 days. If there was insufficient demand for ARS at an auction, the auction was considered to have failed, and no exchanges occurred. If there was a failed auction, a predetermined rate of interest or dividend known as the maximum rate was triggered. This maximum rate was intended to entice investors to purchase the ARS or, alternatively, to prompt the issuer of the ARS to refinance and thereby maintain liquidity in the ARS market. Despite a saturated market, UBS underwrote billions of dollars of ARS. In connection with each underwriting, UBS issued prospectuses that disclosed the risks of investing in ARS and the potential for the auction dealer to place supporting bids in the auctions. The prospectuses specifically explained that the market for ARS was not always set by traditional forces of supply and demand. Additionally, in an attempt to appease issuers and maintain a high credit rating, the ARS that UBS underwrote tended to have low maximum rates. UBS sought to prevent widespread knowledge that the ARS had low maximum rates. To that end, according to certain investors in ARS (the investors) (plaintiffs), UBS played an inappropriately active role in the auctions, including by placing supporting bids, to create the appearance of market liquidity when there was in fact insufficient demand for ARS. Eventually, when the credit market collapsed in 2007 and 2008, UBS declined to further intervene in the auctions. Many auctions failed, and the investors were forced to continue to own ARS in an illiquid market or otherwise to sell ARS at a loss. The investors sued UBS and certain UBS executives in federal court. The investors argued that UBS and the executives committed securities fraud by violating the antimanipulation provisions of the Securities Exchange Act of 1934 (Exchange Act). In response, UBS and the executives moved to dismiss. UBS and the executives argued that they did not commit any manipulative conduct because the risks of investing in ARS were fully disclosed.