CAPITOL — New York State Attorney General Andrew Cuomo on Thursday announced a “multi-billion dollar” securities fraud lawsuit against UBS Securities LLC and UBS Financial Service Inc.

New York is the second state to file suit against UBS for securities fraud, the first was Massachusetts.

The state’s lawsuit alleges UBS falsely sold and marketed auction rate securities as safe, highly liquid and cash-equivalent securities. Cuomo said those claims were false, and when the auction rate securities market came under strain customers were left with securities that could not be liquidated.

UBS officials issued a statement expressing frustration at the lawsuit.

“UBS categorically rejects any claim that the firm engaged in a widespread campaign to move ARS inventory from the firm’s own books and into private client accounts. Our records demonstrate that UBS built up its own inventory of ARS from $5.9 billion at the end of 2007 to approximately $11 billion at the end of [first quarter 2008],” UBS spokesman Kris Kagel said in a released statement.

Auction rate securities are debt instruments with a long-term maturity dates for which the interest rate is reset through auctions, which are typically held every 7, 28 or 35 days.

In February, the $300 billion ARS market dried up when the major institutions, including UBS, became unwilling to bid on the instruments because the risk of buying the securities was deemed too great after the financial stress incurred by the subprime mortgage crisis.

Latham-based hydrogen fuel cell development company Plug Power was one company left with millions in securities that could not be liquidated. Plug filed its own lawsuit in U.S. District Court in Albany against UBS Financial Services on May 8, claiming UBS owes them $62.8 million for improperly investing the company’s money in ARS. Plug alleges UBS broke its fiduciary duties by investing in securities it was not authorized to invest in, namely ARS with interest rate caps.

George Carpinello, Plug Power’s attorney for the lawsuit, said the two state suits against UBS back up claims made by Plug. He said the cases differ in that Plug also alleges UBS defied its investment agreement with Plug.

“The difference is when the [ARS] market collapsed in February the uncapped ARS [went] to a default rate, which is very high and causes the issuers to immediately redeem them. The capped ARS, which UBS bought for us although they were told not to, reset at a very low rate. For some of them it’s zero percent, so not only are they illiquid — because there is no market to sell them in unless you take a very substantial cut in value — but also you get very, very low interest,” Carpinello said.

Kagel said UBS declines to comment on Plug’s lawsuit.

According to the attorney general’s office, UBS was a market leader in ARS sales with more than 50,000 customer accounts, including over 7,000 New York customer accounts.

Cuomo said that his investigation has revealed that in the final months before the auctions failed, UBS’ management became increasingly concerned with the growth in its ARS holdings and its need to support auctions in order to avoid auction failures. UBS created an auction rate securities working group specifically to address the floundering market and look for ways to have its financial advisers sell the ARS and lessen the mounting pressure of UBS’ growing inventory. On Feb. 13, UBS stopped supporting its auctions and UBS customers were left with illiquid assets.

Cuomo said the goal of the state’s suit is returning cash to investors who bought UBS’ illiquid securities.

According to Cuomo, UBS clients are holding more than $25 billion in illiquid, long-term paper as a result of UBS’ fraudulent misrepresentations and illegal conduct.

Kagel said UBS continued to support the auctions longer than any other major firm and was the first to offer clients loans of up to 100 percent of the par value of their ARS holdings at preferred lending rates.

Carpinello said Plug has been hurt by having its money tied up in ARS it can’t sell.

“It restricts Plug’s ability to make strategic investments and plan for its future. [Plug’s] not in any immediate danger of running out of cash certainly but this is working capital,” Carpinello said. “The fact that you’ve got $62.8 million tied up certainly puts a crimp in your business plan.”

In June, Plug Power fired 80 employees. At the time Plug Power President and Chief Executive Officer Andy Marsh said the firings were not connected to the money tied up in ARS.