After a one-week hearing on a hedge fund's claim that UBS violated state securities laws when it sold mortgage-backed CDO's to it in 2007 and early 2008, a Connecticut trial court judge required UBS to post a $35 million bond to secure a potential future judgment against the investment bank. In requiring the posting of a bond, the court found that there was "probable cause" for a determination that UBS had violated securities laws.
During the hearing, the court took testimony of several witnesses from UBS. As quoted in the Reuters coverage of the decision (here), the court made several damning findings against UBS. The main thrust of the decision is that UBS had already been told by rating agencies Moody's and S&P that they would be issuing downgrades on the credit ratings of the CDO's that UBS was selling. Despite this knowledg, UBS sold the CDO's without disclosing the impending downgrades.
The main issue in this case is whether UBS had a duty to disclose the knowledge of impending downgrades. The judge found that it did. This is most likely based on the fact that the securities offering materials for the CDO's contained discussion of the risks of buying the securities, which no doubt included the risk or people defaulting on the mortgages that backed the CDO's. The offering materials also no doubt touted the investment-grade rating of the bonds. Under these circumstances, the court found that UBS had a duty to speak, to disclose the new information in order to correct the information already disclosed to investors.
The court also focused on internal UBS emails that referred to the CDO's it sold to the hedge fund as "crap" and "vomit" to support the allegations of fraudulent nondisclosure, and concluded that "UBS alone possessed the knowledge of what their product, their inventory, was truly worth. While UBS would argue that such descriptors lack a precise meaning, the true meaning of these words and the true value of UBS's wares became abundantly clear when the Plaintiffs' multi-million dollar investment was completely wiped out and liquidated by UBS shortly after the last of the Note purchases was consummated." Thus, in addition to the securities issues, this case is another example of how the careless use of email and the conversational tone that people use in emails can boomerang back at a company during litigation.
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Posted by: Margaret | February 05, 2010 at 05:03 AM
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Posted by: UGG Classic Mini | October 06, 2011 at 09:07 PM
This type of thing seems very common. Hedge funds seem very risky these days and their regulaion and reputation seems questionable.
Posted by: Mortgage Services | November 20, 2011 at 01:08 PM