Mass. gov'ts, agencies to recover $35M in UBS settlement

Wednesday's agreement came three months after the state began investigating whether the Switzerland-based investment bank misled the governments into believing that their investments were sufficiently low-risk to make them permissible for cities and towns under state law.

State Attorney General Martha Coakley, who announced the settlement with two units of parent firm UBS AG, said her office was still reviewing whether to propose additional penalties against the company under the state's False Claims Act.

A New York-based spokeswoman for UBS, Karina Byrne, said the firm agreed that the municipalities investments in so-called auction-rate securities weren't allowed under state law.

Byrne said UBS was pleased with the settlement, in which the company agreed to reimburse more than $35 million, representing the principal payments the municipalities initially made for their investments.

At issue are investments that UBS arranged for the local governments to acquire short-term bonds known as auction-rate securities, which were once considered safe ways to borrow. But starting in February, weekly and monthly auctions at which investors normally purchase such investments failed to yield buyers, as investors sought to avoid risk amid turmoil in credit markets.

Many local governments relied on the more than $300 billion auction-rate securities market to finance everything from water projects to road work and hospital expansions. But governments have recently found their cash frozen as buyers dried up, putting short-term financing for their projects in jeopardy.

While local governments in other states have ended up in similar trouble, UBS' Byrne said, "The reasons supporting this (Massachusetts) agreement apply only to the circumstances of this specific case under Massachusetts law."

Massachusetts towns due to receive cash under the settlement are Andover, Barnstable, Belchertown, Boylston, Dedham, East Longmeadow, Hudson, Mattapoisett, Needham, Warren, Wayland, Westborough, Whitman and Winchester. Also due to recover money are the cities of Chicopee and Holyoke; the City of Holyoke Contributory Retirement System; Town of Merrimac Light; and the Massachusetts Turnpike Authority.