Two Detroit retirement system pension plans are suing UBS AG for allegedly defrauding them into investing and losing $40 million in a complex structured product called a Collateralized Loan Obligation or CLO. The Plaintiffs allege, among other things, that UBS misrepresented the risks associated with the CLO as well as its ability to monitor and control those risks. Plaintiffs further allege that the misrepresentations were part of a fraudulent scheme by UBS to move risky loans from its balance sheet by securitizing them and selling tranches or slices to unsuspecting buyers like Plaintiffs.
According to the Complaint, UBS, through a subsidiary called Dillon Read Capital Management, had acquired $20 billion of collateralized loans, but by May of 2007, the market value of such loans had deteriorated, and UBS wanted to get rid of them. Plaintiffs accuse UBS of making them a part of its exit strategy. UBS allegedly referred to its dumping of CLOs as moving “crap” and “dry gun powder.”
The suit, which seeks rescission of the $40 million of investments, punitive damages and attorney’s fees, was filed in a Michigan state court on September 2, 2010. It has been removed by UBS to federal court. The case is General Retirement System of the City of Detroit et al. v. UBS AG et al., case number 2:10-cv-13920, in the U.S. District Court for the Eastern District of Michigan.
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