New York Attorney General Andrew Cuomo has filed a lawsuit against Swiss investment bank UBS AG (UBS: sentiment, chart, options) for allegedly misrepresenting investment risks to its clients. Cuomo said today that the bank improperly told clients that auction-rate securities were safe and liquid cash equivalents; at the same time, executives rushed to divest themselves of $21 million in the securities as the market seized up. In a press release, Cuomo stated, "Not only is UBS guilty of committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of customers holding the bag."

UBS said it will vigorously defend itself against the lawsuit. A company spokesperson said, "While UBS does not believe that there was illegal conduct by any employee, we have found cases of poor judgment by certain individuals and are evaluating appropriate disciplinary measures for these individuals." Last week, the Swiss bank tried to deflect some heat by announcing it would repurchase as much as $3.5 billion in auction-rate securities from its clientele. Already, the state of Massachusetts has filed charges against UBS regarding the same matter; Texas regulators plan to hold a hearing in September to investigate the auction-rate securities debacle.

At last check, UBS shares are down about 5%, extending their year-to-date decline of more than 48%. Checking in on option activity, it appears as though some traders are adding new put positions on the bank. Volume of 3,303 contracts has changed hands on the August 22.50 put, which carries open interest of 1,277. Meanwhile, the September 22.50 put has traded volume of 3,733 contracts on open interest of 2,472.