UBS loses complex derivatives case in High Court

UBS sold four highly complex derivatives known as single tranche collateralised debt obligations (STCDOs) to Kommunale Wasserwerke Leipzig (KWL). KWL entered into agreements both directly with UBS and via intermediary banks Depfa Bank and Landesbank Baden-Württemberg (LBBW).

The STCDOs each consisted of a synthetic portfolio of credit default swaps on which KWL “sold” credit protection to UBS in exchange for payment of a premium. They had a notional value of over $400m and were managed by UBS Global Asset Management. After the STCDOs defaulted and suffered serious losses after the financial crisis, it emerged that the sale of the STCDOs had been procured by substantial bribes paid by KWL’s financial advisers, Value Partners, to former KWL managing director, Klaus Heiniger.

UBS was seeking to enforce each of the STCDOs against KWL and the intermediary banks. After a 14 week hearing, Mr. Justice Males dismissed UBS’s claims against KWL. He found that Value Partners had, without UBS’s knowledge, acted as an agent for the bank in paying bribes to KWL, but UBS was aware that Value Partners was seeking to advance its relationship with UBS at KWL’s expense.

He ordered KWL to repay around USD35 million of the STCDO premiums as part of the rescission order. KWL was also not able to claim USD70 million in early termination payments under credit default swap contracts it had also entered into. UBS’s claims against Depfa and LBBW were also dismissed on the grounds that the banks had been induced to enter into the transactions by UBS’s fraudulent misrepresentations.