Legal News

?More Crap to Pursuit?: Judge Highlights Frank Words In UBS Suit

By Ashby Jones

It hasn’t been the best of times for UBS AG. In February, the bank agreed to pay $780 million to settle claims that it had defrauded the IRS. And last month, after a lengthy battle with the Department of Justice, the bank agreed to turn over the names of several thousand account-holders, many of whom are suspected of evading paying U.S. taxes.

Another possible black-eye for the bank takes us to the Nutmeg State, where trial is going on involving a Stamford-based hedge fund called Pursuit Partners LLC. On Tuesday, the judge presiding over the case, Connecticut state judge John F. Blawie, ordered UBS to set aside $35.5 million to cover a potential judgment against it in a case involving debt securities that the bank’s employees called “crap” and “vomit,” according to the judge’s decision. Click here for the WSJ story; here for the opinion.

Pursuit Partners claims that UBS, knowing that investment-grade debt securities were about to be downgraded, sold the securities to Pursuit in 2007 as the mortgage market was deteriorating.

To date, relatively few cases involving these debt securities, known as collateralized debt obligations, have been brought. But for much of the past two years, regulators as well as private lawyers have looked for evidence that Wall Street banks and money managers knew the subprime market was in trouble yet masked the problem in their disclosures to investors.

Until now, the litigation has revealed little about what the banks allegedly knew about the securities’ risks. Judge Blawie’s ruling cited an email from a UBS banker saying he had “sold more crap to Pursuit.”

In its complaint against UBS, Pursuit alleged that UBS sold debt securities to Pursuit in 2007 without disclosing that the bank believed that ratings agencies were poised to downgrade the debt securities. Pursuit agreed to invest in the debt securities between July and October 2007. In October, Moody’s downgraded billions of dollars of CDOs, including those Pursuit bought. A few months later, Pursuit’s securities defaulted and it lost its entire investment.

In his decision, Judge Blawie wrote that Pursuit had “presented sufficient evidence to satisfy the probable cause standard with respect to their claim that UBS was in possession of superior knowledge that was not readily available” to Pursuit.

In its statement, UBS said Judge Blawie’s decision was a “preliminary procedure to require defendants to post security while a case is pending, nothing more. The decision is not a decision on the merits or a prediction of the outcome of the case. UBS is confident that it will prevail on the merits of the case.”

Full post as published by Law Blog - WSJ.com on September 10, 2009 (boomark / email).