New York state attorney general Eliot Spitzer’s office is suing brokerage firm UBS Financial Services Inc. over allegations that it defrauded thousands of its customers by shifting ill-suited clients into fee-based accounts.

Spitzer’s office claims that the firm moved inappropriate clients from regular brokerage accounts into its ‘InsightOne’ program, despite its far higher costs for those investors, by falsely promoting it as providing personalized advice and other financial planning services.

It alleges that the firm lured unsuitable investors into the program; that it had a conflict of interest for its brokers by giving them a financial incentive to enroll and keep investors even when the program was ill-suited for those investors; and, that it kept many unsuitable investors in the program by encouraging UBS brokers to “churn” their clients’ accounts to surpass the minimum trading requirement.

As a result of the conduct it alleges was fraudulent, Spitzer’s office says that customers paid tens of millions of dollars more in fees than they would have paid in traditional brokerage account commissions.

These allegations have not been proven. Indeed, in a statement, UBS categorically denies that the program was part of a scheme to disadvantage clients, and says that it intends to defend itself vigorously in this matter. “We are disappointed that the NYAG did not review or consider relevant data that supports the firm’s position prior to filing the complaint,” it said.

“UBS is committed to clients’ individual needs,” it said. “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. While InsightOne is not a discount program, since the program’s inception in 1999 UBS clients have saved hundreds of millions of dollars, in aggregate, over what they would have paid in full commissions,” it maintains.

The Attorney General’s civil lawsuit was filed today in New York Supreme Court in Manhattan. The lawsuit charges UBS with violations of state anti-fraud laws, as well as common law fraud and breaches of fiduciary duty. The complaint seeks from UBS disgorgement, damages and restitution, as well as injunctive relief.

In a separate announcement, Spitzer unveiled an agreement with Prudential Insurance Company of America settling allegations of deceptive and anti-competitive practices in the sale of group insurance products to employers throughout the U.S.

Under the agreement, Prudential will eliminate the payment of contingent commissions to brokers on group insurance products, including life, disability and long-term care, and will provide full disclosure of broker compensation to employers who seek to purchase insurance for their employees through Prudential. Prudential will also provide restitution of US$16.5 million to policyholders and pay civil penalties totaling US$2.5 million.

Prudential noted that it cooperated throughout the investigation, and that it voluntarily implemented procedures for the disclosure of contingent commissions. It has now agreed to stop paying these commissions.

“Today’s settlement compensates nationwide employers seeking to provide group benefits for their employees” Spitzer said. “This settlement also helps restore integrity to the insurance marketplace by mandating complete disclosure of payments to brokers.”