David Shulman, the former head of municipal securities at UBS, has agreed to pay $2.8 million to settle allegations he dumped his personal holdings of student loan auction-rate securities after acquiring inside information.

Without admitting he did anything wrong, Shulman agreed to pay New York State to cease an investigation into his sale of auction-rate securities in December 2007, according to a settlement announced Thursday by state Attorney General Andrew Cuomo.

The settlement describes the days leading up to Dec. 13, 2007, when Shulman allegedly told his broker to sell $1.5 million in ARS after learning of dislocations in the market.

ARS are long-term bonds on which the interest rates reset regularly at an auction. Because the auctions occurred at short intervals, the securities typically behaved like short-term paper, since investors had the option of only holding them for a few weeks or months.

However, if an auction fails, the investor is stuck holding the ARS indefinitely, often at a penalty rate.

In early December 2007, Shulman had already determined to sell all of his $5.5 million of ARS, some of which were municipals sand some of which were student loan debt.

On Dec. 7, 2007, he instructed his broker to dispose of all his ARS at their next auctions, some of which occurred as late as Jan. 9, 2008.

A few days later, the head of UBS' [UBS] short-term trading desk e-mailed Shulman about swelling inventory of student-loan ARS.

UBS propped up the auctions for which it was lead broker by placing "support bids" to cover any gaps in demand, which were widening. While the desk normally kept about $1.3 billion of the securities, the inventory had bloated to $3.15 billion.

The managing director in charge of flow trading and sales for the municipal securities group told Shulman he was "very concerned" about the company's support for the ARS, and said the product was "flawed."

The chief risk officer also told Shulman he was "very nervous" about having such a big position on so many ARS.

Cuomo alleged Shulman then contacted his broker and told him to sell his $1.5 million in student-loan ARS immediately — not at the next auction as he had previously requested.

His broker sold the paper to the company's own trading desk, even dropping Shulman's name to ensure an immediate sale, according to attorney general.

If he had waited, the auction may have failed and he could have been stuck with the ARS, Cuomo said in the settlement.

About 50,000 UBS customers, without the benefit of inside information, were saddled with $30 billion in illiquid ARS after auctions failed en masse on Feb. 13, 2008, Cuomo said.

UBS bought back at par the ARS it sold to clients under a separate settlement.

Under the settlement with the attorney general's office, Shulman may not work for a broker for 30 months, beginning with his July 2008 suspension from UBS. The prohibition will end at the beginning of next year.

From August 2006 to August 2008, Shulman was the highest-ranking executive with day-to-day responsibility for the auction-rate security program at UBS.