BusinessWeek has provided investors a valuable public service by reading through rafts of e-mails subpoenaed by Massachusetts and New York in their suits against UBS AG (NYSE: UBS). Its analysis reveals that the collapse of the $330 billion Auction Rate Securities (ARS) market -- in which customers bought what they were told were cash-like investments with slightly higher yields that reset in weekly auctions -- did not collapse in the way that ARS peddlers claimed. And this difference between what BusinessWeek reveals and what ARS peddlers claim could put the peddlers in deep legal yogurt.

ARS peddlers claim the weekly auctions were going great until February 2008 when they suddenly failed. BusinessWeek found that ARS auctions began failing over two years earlier than the ARS peddlers claimed. Specifically, it found that "from January 2006 through February 2008, UBS bought securities at 88% of the 30,000 auctions it ran" because not enough buyers showed up at the auctions. And UBS and 15 other brokerages failed to disclose that they were propping up the auctions. As a result, in 2006, the SEC fined those brokerages $13 million -- including Citigroup (NYSE: C) and Merrill Lynch & Co. (NYSE: MER) -- for "failing to disclose that they sometimes supported the auctions."

Despite their efforts to support the auctions, ARS inventories accumulated on brokers' books. By August 2007, UBS's inventory had tripled to $3 billion, from $1 billion in March 2007. David Shulman, the UBS executive in charge, mobilized his 850 brokers to dump the ARSs from UBS' books to its private client accounts. But Shulman, who is on-leave from UBS, front-ran that trade. As BusinessWeek reported, "Only hours earlier, Shulman had moved to cut his personal exposure. E-mails show that UBS's compliance department cleared him to sell $475,000 worth of auction-rate securities from his own account."