Auction Rate Securites
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General counsel quits as UBS fallout continues
August 4, 2008
By Joanna Chung, New York
David Aufhauser has quit as the general counsel of UBS’s investment banking division as the fall-out widens from investigations into the failed market in auction rate securities.
His departure comes shortly after revelations that he is among the unnamed UBS officials
accused by Andrew Cuomo, New York attorney-general, of selling their personal holdings
in ARS “as the storm clouds loomed” over the market.
The securities are long-term debt but interest rates are periodically reset at auctions supported by banks. But the sector started to falter as liquidity began to dry up.
Mr Cuomo’s civil complaint does not name any executives and Mr Aufhauser has not been charged with any wrongdoing. Mr Cuomo has charged UBS with selling ARS while falsely marketing them as safe and liquid, allegations the Swiss bank is defending.
But people close to the matter say that Mr Aufhauser is the person identified in the suit as “Executive A”. At least seven executives sold more than $21m of their holdings in ARS based on inside knowledge of problems, according to Mr Cuomo’s complaint.
“Executive A” was among the recipients of an e-mail on Friday December 14 from UBS’s chief risk officer that outlined problems in the ARS market. On that evening, the complaint says, “Executive A” sent an e-mail to his personal financial adviser saying: “I want to get out of arcs [sic].” All $250,000 worth of “Executive A’s” ARS were sold in transactions on December 18 and 21, the complaint said.
In February, “Executive A” was notified about another executive’s ARS trading, and questioned their propriety, according to the complaint, which said that on February 12, the day before UBS stopped supporting its auctions, “Executive A” instructed his adviser to buy back the exact same ARS that had been sold in December. Although that was not possible, Executive A’s adviser bought $300,000 in “substantially similar” ARS.
Mr Aufhauser’s attorney could not be reached for comment. People familiar with his decision said he decided to resign for “personal reasons” including to spend more time with his family.
UBS said: “After an internal review assisted by independent external counsel, UBS does not believe there was any unlawful conduct by any employee in this matter.” Mr Aufhauser will continue in a consultative role at UBS until the end of September.
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