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NH regulators say UBS defrauded student lender; bank denies it

By JOE MAGRUDER | Associated Press Writer

1:09 PM EDT, August 14, 2008

CONCORD, N.H. (AP) _ New Hampshire securities regulators on Thursday accused banking giant UBS of defrauding the state's leading issuer of student loans.

In a civil complaint, the Bureau of Securities Regulation said that while UBS Securities LLC was steering some clients out of the auction-rate securities market last winter because of signs the market would collapse, it was advising the New Hampshire Higher Education Loan Corp. to offer higher interest rates so it could stay in.

"Our investigation revealed that UBS had knowledge that a market collapse was looming but did not disclose that information to the NHHELCO," said Jeff Spill, the bureau's deputy director.

UBS denied defrauding anyone and will vigorously defend itself.

"This complaint attempts to link a single client interaction with overall market conditions which affected all student loan issuers, and as such we believe there is no basis for these specific allegations," UBS said in a statement e-mailed by spokeswoman Kelly Smith.

The regulators seek unspecified fines and restitution and a halt to the alleged misconduct. They said a hearing examiner will be appointed for proceedings that could easily take months.

But with college classes about to start, bureau Director Mark Connolly said UBS and other big banks should act on their own to shore up the lending capacity of programs such as NHHELCO. He said student loan issuers and borrowers in other states are in similar jams.

"Their goal should be to figure out how to get student loans out," he said.

Last week, parent company UBS AG announced a big settlement to help investors who bought auction-rate securities. Connolly applauded the settlement, but said it did little or nothing to help lenders such as NHHELCO or the thousands of students who rely on them.

Because of the market collapse, NHHELCO had to shut down two loan programs in March affecting about 6,500 students. Following UBS' advice to offer higher interest cost the lender about $25 million, president and chief executive Rene Drouin said.

"That's just the tip of the iceberg," he added. "That's what we have calculated in terms of direct costs."

NHHELCO handles 80 percent to 85 percent of the student loans in the state or $250 million worth annually, Drouin said. Using other banks and credit unions, it has continued handling federal student loans totaling about $90 million.

UBS Securities, UBS' investment banking branch, has been the longtime financial adviser and underwriter to NHHELCO.

Student-loan issuers such as NHHELCO and municipal agencies were major issuers of auction-rate securities, whose rates were reset at frequent auctions. Big banks stopped supporting the auctions as part of the broader credit crisis last winter.

Federal and state regulators have been investigating to determine who was responsible, and other banks, notably Citigroup Inc., have agreed to settlements with investors.

UBS said it was frustrated by Thursday's filing "given that we have been in discussions with them and NHHELCO regarding the unique issues being raised by the state" and that it had just settled with investors.

It said the filing "has no impact on that settlement and UBS clients in New Hampshire will be made whole under the settlement proposal."