State regulators are investigating whether some of the country's biggest financial managers have defrauded Alaska investors.

In recent months, millions of dollars' worth of Alaskans' short-term savings -- including sums belonging to entrepreneurs and the state's largest telecom company -- have been frozen.

Some local investors said they feel betrayed. They say their financial advisers assured them their money would be parked in ultra-low-risk, easy-to-sell securities that were "as good as cash."

Meanwhile, the investment firms that underwrote and sold these securities to investors generated a lot of fees for themselves, said Roger Prince, a securities examiner for the Alaska Division of Banking and Securities.

Internal documents subpoenaed by the state of Massachusetts show that even as one global financing giant UBS, became alarmed about its involvement in underwriting the securities, it pushed them even harder on small businesses, retirees and other investors as a safe place to put their cash.

Last winter, the market for these investments -- called auction-rate securities -- fell apart when large financial institutions, including UBS, hurting from the national credit crunch stopped funneling their own money to support the market.

State and federal regulators are investigating whether the money managers who marketed the securities defrauded the investors.

For now, the investments are frozen -- they can only be sold at auction, and most of the auctions have failed. The value of many of them is eroding due to penalty interest rates.

Some investors are wondering whether they will ever get their cash back, Prince said.

"It's been a real nightmare for some people," he said.

His division is investigating complaints lodged in recent months by a number of Alaskans. He declined to share details of the complaints, but he said anyone who has concerns about their investment in auction-rate securities should contact his office.

BROKEN DREAMS

Anchorage resident Bryce Coryell is one person who complained to state regulators.

Coryell, 24, had saved up $100,000 to start a new business. In 2006, his financial adviser recommended that he store the money in auction-rate securities.

Before authorizing the investment, here's what Coryell learned: Interest rates on the insured, triple-A rated bonds his money would be invested in were set at weekly or monthly auctions; the interest yield was generally higher than for other types of cash management accounts.

What he didn't learn until too late: When the auctions failed, it triggered penalties for those securities -- interest rates as low as zero, punishing the investor, or very high interest rates, punishing the cities, utilities and universities that issued the securities.

For Coryell, the punishment was a much lower interest rate than he expected. But that wasn't the worst of it.

When more than a thousand auctions failed in February, people like Coryell who owned the securities were stuck with them, at least for a while. So much for the "easy-to-sell" assurance.

Coryell doesn't know when he'll be able to access his savings again -- it's frozen now -- and is pessimistic that he'll get back the full value of his savings.

"I wanted to start my own business. Now I can't do that," he said this week.

OTHER LOSSES

In March, the Anchorage-based Alaska Exchange Corp. filed a $6 million lawsuit against UBS to collect the funds that the local company had invested on behalf of its clients.

Alaska Exchange used auction-rate securities to store large sums used for complex real estate trades it handles for clients ranging from the Bethel Native Corp. to a local construction company, court records show.

The company originally placed those sums in low-risk money-market accounts. But five years ago, its UBS financial advisers in Anchorage recommended moving the money into a triple-A rated investment account, from which it could be withdrawn on a week or a month's notice, according to the lawsuit.

A large amount of Alaska Exchange's clients' money ended up frozen after the auctions failed in February, the lawsuit said.

The case recently settled but the terms are confidential, according to an Anchorage plaintiff attorney involved in the case.

UBS RESPONDS

Last week, the state of Massachusetts sued UBS, accusing it of fraudulently withholding important information about auction-rate securities from investors.

UBS continued to market the securities to investors even after it began warning bond issuers last year of a possible meltdown in auction-rate securities, the suit claims.

UBS will defend itself against the fraud allegations, according to company spokesman Kris Kagel.

The company is also offering loans to its clients who are stuck with the securities.

OTHER VICTIMS

More than $1 million belonging to Alaska Communications Systems, the big Anchorage telephone, wireless and Internet company, is still frozen as a result of the auction market failure.

ACS officials said they are confident the company will eventually get all its money back. A financial statement filed with the U.S. Securities and Exchange Commission said that on March 31 it owned $4.5 million worth of the securities and that it didn't think it would be able to find a buyer for them anytime soon. But, it has been able to unload much of this investment.

ACS says it doesn't have a serious liquidity problem, unlike some other investors.

"We can wait for the process to unfold over time," said David Wilson, the company's chief financial officer.

Find Elizabeth Bluemink online at adn.com/contact/ebluemink or call 257-4317.