Connecticut Court Finds Probable Cause That UBS Committed Securities Fraud; Orders $35 Million Bond, as Reported by Burg Simpson

September 9, 2009

A Connecticut Superior Court Judge has ordered UBS AG and UBS SECURITIES, LLC ("UBS") to pledge assets or post a bond in the amount of $35,573,904.53 within 10 days. The Court found "probable cause" that UBS used secret insider information obtained from its special relationship with the ratings agencies (Moody's and S&P) to commit securities fraud in the sale of Collateralized Debt Obligation ("CDO") Notes to a Connecticut hedge fund, Pursuit Partners.

In the 29-page opinion, Superior Court Judge John F. Blawie made several explosive findings, including:

• "Through direct and circumstantial evidence, Pursuit has established probable cause to sustain the validity of a claim that the UBS defendants were in possession of material nonpublic information regarding imminent ratings downgrades on the Notes it sold to the Plaintiffs, information UBS withheld from the Plaintiffs." Order, p. 28.
• "The use of the term 'triggerless', which was used by UBS to entice the Plaintiffs to purchase the same Notes they had earlier rejected, is akin to a representation by UBS that a gun being handed to the Plaintiff is not loaded, when in fact UBS knew the gun was not only loaded, but was about to go off." Order, p. 28.
• "The court takes UBS employees at their word when they referenced their Notes, these purported investment grade securities which they sold, as 'crap' and 'vomit', for 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." Order, p. 28.
• "That is the difference between a risk that something might happen to change the value of an investment, which is both a fact of life and a risk shared by all parties to any securities transaction, and the undisclosed knowledge that something will happen. That type of nondisclosure, whether it is on the part of a seller or a buyer, can cross the line into actionable securities fraud, and the court finds probable cause to sustain a finding that in this instance, it did." Order, p. 28.
• "On July 11, 2007, the day that Moody's publicly announced it was putting 184 CDO tranches on review for possible downgrade, Morelli [head of the UBS syndicate desk] sent an email simply stating 'put today in your calendar.' In explaining the context of that email, the significance of that day was described to the court by Morelli as, 'Today was essentially the beginning of the end of the CDO business, meaning the bonds were getting downgraded, they were probably going to get downgraded further and we [UBS] were going to lose a lot of money.'" Order, pp. 17-18.
• "UBS failed to disclose and actively concealed the fact that based upon this change, the Notes being marketed by UBS would not maintain their investment grade rating, and would lose a significant amount of value, if not the liquidation of the entire investment." Order, p. 18.
  

The Court's Order was issued at the conclusion of a one-week hearing. The Court took testimony of various UBS employees and reviewed documents, including internal email communications within UBS, and among UBS and the ratings agencies. The evidence showed that UBS was given a private "head's up" that the ratings agencies' ratings were false, and that catastrophic downgrades were imminent months before they actually occurred. UBS had moved to dismiss all of Pursuit's claims at the same hearing, and that motion was denied as to most of the claims in a 66-page order issued by the Court earlier this Summer.

The Plaintiff, Pursuit Partners, is a Connecticut investment fund represented by the national trial firm of Burg Simpson Eldredge Hersh and Jardine, P.C. Burg Simpson has its main office in Englewood, Colorado, and is currently at the national forefront of securities litigation arising out of the 2007 CDO market collapse.

About the order, lead trial counsel Michael S. Burg said "This historic decision is what we believe is the first of many that will reveal the truth as to how American investors suffered hundreds of billions of dollars in losses due to the egregious acts of the world's largest banks and the rating agencies."

"We at Burg Simpson understand that this is only the beginning of a long hard fight," said co-trial counsel David K. TeSelle. "We are committed to this fight for as long as it takes to rightfully compensate those who trusted the banks and the rating agencies, and as a result of the breach of that trust, suffered significant losses in their retirement accounts, college funds and life's savings. It is the right thing to do."

SOURCE Burg Simpson Eldredge Hersh & Jardine, P.C.