In the first state-level lawsuit against an investment firm over auction-rate securities, Massachusetts Secretary of State William Galvin has filed securities fraud charges against UBS Securities and UBS Financial Services for selling retail investors auction-rate paper as "liquid, safe, money-market" instruments even though the defendants knew it was not.

In a 100-page complaint, Galvin said that UBS broker-dealers and financial advisors did not disclose to their clients the extent to which the Swiss-based bank bid in auctions to prevent them from failing and that no true auctions in fact existed because they would have failed without support from dealers. UBS also did not disclose to customers the conflicts of interest that UBS exposed itself to in its dual role in underwriting the securities and selling them to clients, Galvin said. Both units are part of parent company UBS AG.

The five-count administrative complaint, which was to be heard by a hearings officer within the department's securities division, asks that UBS be ordered to return to investors the money the bank invested in auction-rate securities at par and that it make restitution to investors who have had to sell at below par. It also asks that UBS be ordered to cease and desist from further violations of the state securities law, be censured and be subject to an administrative fine.

The complaint reveals that UBS had considered getting out of the auction-rate market as early as last September, but placed tremendous pressure on its wealth management advisors to get their clients to invest in auction-rate securities last fall because the firm's inventories of the securities had ballooned well beyond a self-imposed $2.5 billion cap. The lawsuit followed the formation of a state securities regulatory task force formed to share information.