Fuel cell firm sues adviser for student loan investments

PHOTOGRAPHER: James Schlett

Fuel cell maker Plug Power has become ensnared in the student loan crisis, with almost half of its investment portfolio tied up in bonds investors are reluctant to touch.

With $62.9 million in funds stuck in auction rate securities backed by federally guaranteed student loans, Plug is suing the New Jersey investment adviser that allegedly made those investments in January.

The $300 billion ARS market dried up a month later, leaving investors with few and painful options to turn their securities into cash for operations and payments.

Plug on Thursday filed a lawsuit in U.S. District Court in Albany against UBS Financial Services, the Weehawken, N.J., firm that has served as the Latham company’s financial adviser since 2005. Plug alleges UBS broke its fiduciary duties by investing in securities it was not authorized to invest in, namely ARS with interest rate caps.

“Specifically, UBS knowingly supplied false information with regard to the liquidity of the ARS in which Plug Power’s assets were invested. UBS stated that the ARS were virtually equivalent to money market investments or cash,” the suit states.

ARS are securities backed by student loans, municipal bonds, preferred stock or collateralized debt obligations. Their interest rates reset at weekly or monthly auctions. Brokers have been finding fewer buyers for ARS, resulting in auction failures.

Wall Street has dubbed last Valentine’s Day “Bloody Thursday” because of the overwhelming number of ARS auction failures then. On that day, UBS told Plug the ARS market had “seized up” and it was facing a “liquidity problem,” according to court documents.

The growing occurrence of auction failures plus changes in federal law have prompted many banks — including M&T Bank, First Niagara Bank and TD Banknorth — to back out of the Federal Family Education Loan program.

The lender exodus from FFEL, which includes Stafford student and Plus parent loans, threatens to complicate students’ ability to get financing for college. It could also steer them to costlier private loans.

Corporations, too, are being hurt by the student loan crisis because they are heavy investors in ARS. On Jan. 9, UBS allegedly used Plug’s $62.9 million — 44 percent of Plug’s investment portfolio — to make 18 investments in ARS backed by student loans, according to court documents.

“There is no immediate concern, but it’s something we want to take care of quickly,” said Plug spokesman Eoin Connolly.

Plug, which employs 300 worldwide, manufactures devices that use hydrogen to make electricity. UBS is the second largest underwriter in the ARS market. It is a subsidiary of the Zurich, Switzerland-based UBS AG, which is also named as a defendant in the case.

“UBS is committed to addressing our clients’ concerns about the market events that cause the breakdown of liquidity for auction rate securities. We are working with clients, on a case-by-case basis, to address their immediate liquidity needs, offering such solutions as loans up to 100 percent of the par value of their ARS holdings at preferred lending rate,” UBS spokeswoman Katrina Byrne said in an e-mail.

In announcing its first quarter results Thursday, Plug posted a $2.8 temporary impairment charge related to the ARS. The company said it will hold the securities and wait for a successful auction or sell them in the open market.

In the suit, Plug accuses UBS of breach of fiduciary duty, fraud, breach of contract and negligent misrepresentation.

Plug wants a federal judge to issue a declaratory judgement voiding UBS’ transactions. It is also seeking unspecified compensatory and punitive damages and the disgorgement of profits UBS realized from the alleged improper transactions.