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Wednesday, July 23, 2008

Mr.Cuomo: ARS Investors Don't Need a Spitzeresque Settlement

After learning that New York Attorney General Andrew Cuomo is set to bring charges against UBS related to their marketing of auction rate securities, I am of mixed emotions. On the one hand I am pleased that the scandal is resulting in complaints, but I am only cautiously optimistic that the charges and potential settlement will be in the investors’ best interest.

Don’t get me wrong, Mr. Cuomo’s action is certainly welcomed and clearly warranted. Auction rate securities were pitched to investors as cash equivalents and liquidity risks were hidden, which is why I was particularly pleased to see that Mr. Cuomo could file charges against individuals at UBS and seek a broad resolution for investors whose money is tied up in the ARS permafrost.

But a resolution is only as good as its terms and I have reservations that an eventual settlement won’t go far enough. Specifically, it is typical for Wall Street to settle these types of matters without admitting guilt or acknowledging responsibility. Wall Street steadfastly bargains for this because it limits their liability to investor claims. Recall that Eliot Spitzer’s global Wall Street settlement included this “out” clause and many investors lost arbitration claims because of it.

Another common occurrence during the Spitzer regime was Wall Street scapegoating. So long as Mr. Cuomo targets individuals, he should follow the trail as high as it leads and not allow Wall Street’s top brass to sacrifice a few bit players.

Moreover, a resolution that simply makes UBS customers “whole” also is a mistake. For many months ARS holders were prevented from participating in more lucrative investments and making large purchases, such as homes, automobiles and tuition payments. It is reasonable that they should be awarded damages for those lost opportunity costs. And finally, some investors are facing legal fees which should be paid for by UBS.

A UBS settlement could serve as a case study for other ARS investigations. Cuomo and other State securities regulators are investigating Citigroup, Merrill Lynch, J.P. Morgan Chase, Goldman Sachs, Wachovia and many other institutions for similar practices.

We’ve been through the era of headlines, photo-ops and slaps on the wrist. Mr. Cuomo has an opportunity to substantively alter the way in which Wall Street markets its products.

As I said, I am cautiously optimistic.

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