Auction Rate Securites
UBS Judge Refuses to Throw Out Auction-Rate Suit
September 22, 2008
By Thom Weidlich
Sept. 17 (Bloomberg) — UBS AG, Switzerland’s biggest bank, failed to win dismissal of Plug Power Inc.’s lawsuit over auction-rate securities that were purchased for the fuel-cell developer’s account. U.S. District Judge Gary L. Sharpe in Albany, New York, today rejected UBS’s request to throw out the complaint, said Plug Power lawyer George Carpinello of Boies, Schiller & Flexner in Albany. The judge’s decision, made from the bench, means the case may go to trial.
“He rejected the argument that our client didn’t suffer a loss because it still owns the securities,” Carpinello said in an interview. “He said we had suffered a loss because of the decline in value.” Brokerages abandoned the $330 billion auction-rate securities market in February, stranding investors who could no longer sell the bonds at weekly and monthly biddings held to set interest rates. State regulators have settled probes into UBS, Credit Suisse Group AG, Citigroup Inc., Goldman Sachs Group Inc. and five other underwriters of the securities. “UBS’s wide-reaching settlement gives individual, corporate and institutional clients the opportunity to sell their ARS securities back to UBS at par,” UBS spokesman Kristopher Kagel said in an e-mailed statement. “We are disappointed that this case wasn’t dismissed today and we intend to vigorously defend ourselves in this action.”
Plug’s Account
Plug Power, based in Latham, New York, sued Zurich-based UBS on May 8, seeking to
rescind the $62.9 million the bank 10 invested in auction-rate securities for Plug
Power’s account, which was opened in 2005, according to the complaint. The amount
was 44 percent of Plug Power’s portfolio, the company said.
UBS told Plug Power the securities “were highly liquid and safe and that they were virtually the equivalent to money market investments or cash,” according to the complaint. “At the very time when we went to UBS to ask for assurances that the market was OK and they gave us those assurances, UBS was dumping its own portfolio onto customers like us,” Carpinello said.
When an auction fails, the issuer pays a default-interest rate that is typically, though not always, higher than the rate determined by an auction.
Lost Interest
“We alleged not only that we lost the market value of the auction-rate securities
but we lost a substantial amount of interest because the default rate on many of
the securities is zero,” Carpinello said.
Plug Power was formed in 1997 by Michigan utility owner DTE Energy Co. and Mechanical Technology Inc. to develop and produce a fuel-cell system to light homes and small businesses. DTE holds 9.1 percent of Plug Power shares. UBS fell 5.7 percent to 15.70 francs in Zurich. The stock has declined 33 percent this week, cutting the company’s value to 46 billion francs ($41 billion). Plug Power fell 17 cents, or 7.3 percent, to $2.17 in Nasdaq Stock Market trading. The case is Plug Power Inc. v. UBS AG, 08-cv-496, U.S. District Court, Northern District of New York (Albany).
—With reporting by Christopher Martin in New York.
Editors: Steve Farr, Dan Stets
To contact the reporter on this story:
Thom Weidlich in New York at +1-212-617-2670 or tweidlich@bloomberg.net.
To contact the editors responsible for this story:
Patrick Oster at +1-212-617-4088 or poster@bloomberg.net;
Dan Stets at +1-212-617-4403 or dstets@bloomberg.net.