Published February 12, 2013
NEW YORK – UBS AG has lost a bid to block a securities arbitration by a Minnesota healthcare organization asserting claims arising out of $125 million in auction-rate securities it issued in 2007.
The ruling by U.S. District Judge Michael Davis in Minneapolis on Monday marked the latest decision in a series of disputes over who constitutes a "customer" for securities arbitration before the Financial Industry Regulatory Authority.
Davis found Allina Health System was a customer, despite the bank's arguments that auction-rate securities issuers are not customers of underwriters under the rules of FINRA, the financial industry's self-regulator that runs the arbitration forum to settle disputes between broker dealers and customers.
Auction-rate securities are a type of bond in which investors place bids that determine interest rates.
A spokeswoman for UBS did not respond to a request for comment.
Allina, a not-for-profit health-care system, commenced the arbitration in February 2012, in a case arising out of auction-rate securities it issued in October 2007 as part of an issuance of $475 million in bonds to refinance debt and to finance remodeling and renovations.
UBS was the underwriter of the auction-rate securities issued by Allina.
In February 2008, as the financial crisis gained steam, the auction-rate securities market collapsed as auctions failed. Allina contended the market collapsed due to a decision by UBS and other banks to stop submitting support bids to prevent auction failures.
Allina said that as a result, it was forced to incur considerable costs refinancing the securities in June 2008. It also lost bond insurance, resulting in higher payments on the bonds, it said.
In its statement of claim with FINRA, Allina contended that UBS misrepresented the risks of the auction-rate market and accused it of breaching its fiduciary duties and violating federal and state securities laws.
UBS denied the allegations. In August, it filed the federal lawsuit.
In a 19-page decision Monday, Davis pointed to a series of decisions in similar cases denying banks' claims that a plaintiff was not a customer under FINRA rules.
Most recently, the 4th U.S. Circuit Court of Appeals last month allowed Roanoke, Virginia-based Carilion Clinic to move forward with an arbitration against UBS and Citigroup Inc over $234 million in auction rate securities.
"The Court finds these decisions persuasive and consistent with its finding that Allina is UBS's customer," Davis wrote.
The judge also rejected UBS's contention that its agreements with Allina required any disputes to be filed either with the American Arbitration Association or in courts in New York.
"Obviously I'm just as pleased as whenever we win one of these," said James Swanson, a lawyer for Allina who has been involved in most of the other recent court challenges involving auction-rate securities issuers pursuing FINRA claims.
To date, he said, no court in these cases has ruled that auction-rate securities issuers are not FINRA customers.
But on the question of forum-selection clauses, his firm suffered a rare set back last week.
U.S. District Judge Richard Sullivan on Friday enjoined an arbitration against Goldman Sachs Group Inc by Golden Empire Schools Financing Authority and Kern High School District in California over $125 million in auction-rate securities.
The judge found their agreements required disputes to be brought in New York federal court. Swanson, who said he expects to appeal, said "it seems like that's probably where the fights are going to shift next."
The case is UBS Securities LLC v. Allina Health System, U.S. District Court, District of Minnesota, 12-02090.
(Reporting By Nate Raymond in New York; Editing by Leslie Adler)