updated 12/12/2006 7:05:53 PM ET 2006-12-13T00:05:53

New York Attorney General Eliot Spitzer accused UBS Financial Services Inc. of moving clients into a brokerage program that cost some investors as much as $23,000 per trade, according to a lawsuit filed Tuesday.

UBS denies the civil charges and defended the program it said has saved clients hundreds of millions of dollars since 1999. UBS AG, a global firm that considers itself the world’s leading wealth management business, contends Spitzer didn’t consider all the information available on the company’s practices.

The brokerage moved thousands of clients to the InsightOne program even though it was poorly suited to their needs, Spitzer said.

InsightOne charged fees based on assets, not the number of transactions, a program that favors frequent traders rather than buy-and-hold investors who rarely trade. The effort to move some clients into the program was sweetened with financial incentives that Spitzer said created a conflict of interest.

“CONFLICT is all over this,” stated one internal company document obtained in the investigation.

Spitzer contends brokers must serve their clients and that encouraging customers to act against their best interest creates a conflict.

“UBS is committed to clients’ individual needs,” the company responded. “The InsightOne program was designed to satisfy those clients who sought alternatives to the industry’s traditional commission-based accounts.

“Fee-based brokerage, in which clients pay a fee for trading activity rather than commissions on a per trade basis, offers investors greater choice as well as a way to closely align the interests of financial advisors and clients with respect to growing the value of the brokerage account,” the company said. InsightOne accounts were about 3.5 percent of company’s American accounts.

The lawsuit contends that customers paid UBS tens of millions of dollars more than necessary in InsightOne fees, including:

  • A 91-year-old client who paid $35,000 for four trades over two years. They would have cost her about $2,000 in a traditional brokerage program.
  • Another client who was charged $24,000 for one trade.
  • A couple that was charged more than $23,000 each for two trades, a sum that totaled about 20 percent of the income from their family farm.

UBS is accused of violating state antitrust laws, common law fraud and breaches of fiduciary duty, said Spitzer, who begins his new job as governor on Jan. 1.

“We are genuinely mystified and puzzled as to this entire legal claim,” said UBS spokesman Mark Arena. He said UBS doesn’t know who the clients are that Spitzer singled out.

Arena said clients are moved into the InsightOne accounts only after they are determined to be suitable for it and have agreed to the change. After the first year, UBS analyzes whether the account is best for the client and sometimes recommends they return to a traditional account and, in rare cases, requires the switch back, Arena said.

He said Spitzer’s office has refused to cooperate with them in their attempt to defend the company against the accusations.

“It’s their data,” said Spitzer spokesman Mark Violette. “We negotiated for six weeks. They cut it off and at that point we filed the lawsuit.”

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