The former general counsel of UBS's investment banking unit will pay $6.5 million to settle an allegation that he dumped his investments in auction-rate securities after getting an internal company email warning that the market was in trouble.

David Aufhauer, a former official in the US Treasury, quit UBS in August after he was named in an insider dealing lawsuit brought by New York Attorney-General Andrew Cuomo.

As part of the deal, Mr Aufhauser will give up a $6 million bonus that he had been scheduled to receive from UBS, Switzerland's biggest bank. The state will get the money instead. He will also pay a $500,000 civil penalty.

Mr Aufhauser will also be banned from working in the securities industry or practicing law in New York for two years. He will not face criminal charges and he is not required to admit any wrongdoing.

In a statement, Mr Aufhauser said he was pleased to have settled the matter and that the transaction "resulted in absolutely no personal profit and did not involve any public investors."

New York investigators accused Mr Aufhauser of selling off about $250,000 of his personal holdings in auction-rate securities in December 2007, at a time when executives at UBS were beginning to talk about the possibility of a collapse in the $330 billion market.

According to the Attorney General's office, on December 14, 2007 Mr Aufhauser opened an e-mail from UBS’s chief risk officer warning of problems in the auction rate market. Soon after, Mr Aufhauser sent an email to his personal broker saying he wanted to “get out of arcs”.

Auction-rate securities are popular US debt instruments that are held as an alternative to cash because they earn higher rates of interest but can usually be sold at any time.

Several large investment banks were active brokers in the market, which became an early casualty of the wider credit market problems when it collapsed late last year leaving investors holding billions of dollars worth of securities that they were unable to sell.

Mr Cuomo sued UBS in July, accusing the company of fraudulently promoting the securities as safe, even as it warned internally that trouble was on the horizon.

His investigators said they had identified seven UBS executives who sold $21 million of their personal stakes in the market in the three months leading up to its failure.

"We are looking at a number of executives," Mr Cuomo said Tuesday. He declined to name them or elaborate, but suggested that he was intent on seeking payments from financial services executives who got big payouts even as the industry crumbled.

"If you have situations where senior executives acted improperly, they have to be held accountable, and to the extent there were bonuses or golden parachutes received, they should be recouped," he said.

UBS AG agreed in August to buy back $18.6 billion in auction-rate securities from investors to settle Mr Cuomo's investigation. Other banks entered into similar settlements, including Merrill Lynch, Goldman Sachs, Deutsche Bank, Citigroup, Morgan Stanley, JPMorgan Chase and Wachovia.

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