CDOs Haunt UBS


Swiss banking giant UBS AG is reported to be engaged in settlement discussions with the U.S. Securities and Exchange Commission regarding its structuring and underwriting of an allegedly fraudulent mortgage bond deal.  The SEC has alleged that UBS defrauded clients that invested over $748 million in notes linked to a CDO known as ACA ABS 2007-2.

CDOs (or collateralized debt obligations) are securities linked to pools of debt that are sold in tranches (slices) of varying risks and returns. As previously reported, CDOs played a significant role in the recent financial crisis.

The SEC also is said to be investigating a former executive at bond insurer ACA Financial Guaranty Corp., which served as collateral manager on the CDO deal (“UBS in Talks Over Bond Deal,” by Justin Baer and Jean Eaglesham, Wall Street Journal).  The former ACA executive, Laura Schwartz, was apparently served with a Wells notice last month, in which the SEC informed her that it is considering charges against her.

In a separate matter, this same CDO (ACA ABS 2007-2) is reportedly a subject of a lawsuit against UBS filed by Pursuit Partners LLC, a hedge fund.  The lawsuit accuses UBS of knowing the CDO was about to be downgraded by Moody’s at the time of sale.  The hedge fund allegedly suffered losses of $35.5 million on the deal.

The judge in that lawsuit found that one of UBS’s misrepresentations made to its client was “akin to a representation that a gun being handed to the hedge fund wasn’t loaded, when in fact UBS knew the gun was not only loaded but was about to go off.”

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.