UBS AG (UBS) and Connecticut-based hedge fund Pursuit Partners have settled a securities fraud lawsuit accusing the brokerage firm of selling asset-backed securities without disclosing that they were going to be downgraded. The resolution was reached a day before trial was scheduled to start.
Pursuit Partners claims that UBS sold it $40.5M of collateralized debt obligations in 2007. The hedge fund contends that these were the same securities that UBS employees had called “crap” and “vomit” in emails. The securities fraud case was filed in 2008, with Pursuit seeking $100M.
According to the complaint, UBS purportedly failed to disclose to the Connecticut hedge funds that the firm had engaged in private conversations with employees of Moody’s (MCO) in 2007 about how the credit rating agency did not believe the securities should be rated as investment grade. When Moody’s downgraded them three months later the securities became practically worthless. The plaintiff contended that not only did it know the CDOs were about to become toxic securities but also they plotted to get rid of them by selling them to Pursuit.
The hedge fund, which invested in three CDOs, claims that it lost $35.5 million. Pursuit said that it had been looking for steady cash flow and insisted that it be sold either investment-grade securities or securities with a generally low risk of defaulting. While the Connecticut firm acknowledges that the asset-backed securities it bought from UBS were investment grade, it is adamant that the broker-dealer knew that a ratings downgrade was about to happen.
The terms of the collateralized debt obligation fraud case are not yet available.
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UBS to Settle Hedge Fund’s Suit Over Asset-Backed Securities, Bloomberg, September 1, 2015
In UBS Case, Emails Show CDO Worries, Bloomberg, September 1, 2015