West Palm Beach (HedgeCo.Net) – Swiss bank UBS is facing yet another lawsuit, this time from Stamford, Connecticut based hedge fund Pursuit Partners.
According to the allegations, UBS marketed securities as investment grade, knowing full well that they were on their way to junk bond status. Pursuit asserted that they bought collaterized debt obligations from July – October 2007, based on “fraudulent concealment” by the bank.
UBS used ratings company Moody’s to evaluate the values of the CDO’s. Prior to the subprime mortgage collapse, the securities were rated based upon certain market prices. Post collapse, and amidst pressure to change the current ratings system, Moody’s changed to a market-based formula, and instead focused on the probable future values of securities, rather than the current prices. This was sure to send a good number of mortgage-backed securities straight into junk bond status.
Pursuit Partners claimed that UBS had this prior knowledge of the impending junk status, and failed to relay the message. The result was a $50 million loss suffered by Pursuit, due to the triggering of a default clause in underlying derivatives contracts that was brought about by the ratings changes.
UBS was perhaps one of the poster children for the subprime mortgage crisis. The bank wrote down about $10 billion in losses and was forced to find outside investors to keep them afloat.
After that loss reached $14 billion in February, UBS reported their first annual loss. In addition to the numbers, UBS had to deal with another similar lawsuit, this time from German lender HSH Nordbank, who sued the bank for $275 million, claiming similar allegations resulting from the subprime crisis.
Julie Scuderi
Senior Editor for HedgeCo.Net
Email: [email protected]]
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