Judge socks UBS with bond ruling

A state judge reportedly ordered UBS AG to set aside more than $35 million as a potential award to Pursuit Partners L.L.C., a Stamford-based hedge fund that is suing UBS for selling it debt securities in 2007 that were on the cusp of being devalued.

UBS is among the largest employers in Fairfield County with a giant investment banking and trading operation in Stamford.

In its complaint, Pursuit alleged UBS sold collateralized debt obligations (CDOs) to Pursuit in the summer of 2007, without disclosing that ratings agencies would likely downgrade the debt securities. The instruments soon defaulted and were rendered worthless.

Pursuit is represented by Colorado-based Burg Simpson Eldredge Hersh & Jardine, and its local counsel is Gary Klein of the Stamford law firm Sandak Hennessey & Greco.

 

CDOs were an underlying cause of the meltdown in the credit markets in 2008 and 2009, in many cases representing portions of debt on home mortgages that went into default as homeowners could not cover rising interest rates that kicked in under their contract terms.

 

Judge John Blawie cited an email from a UBS banker saying he had “sold more crap to Pursuit,” according to the Wall Street Journal, and the judge said there was sufficient evidence for UBS to post a $35.5 million bond in case Pursuit prevails in court.

“The court takes UBS employees at their word when they referenced ”¦ these purported ”˜investment grade”™ securities which they sold, as ”˜crap”™ and ”˜vomit,”™” Blawie wrote in his ruling. “UBS alone possessed the knowledge of what their product, their inventory, was truly worth.”

UBS issued a statement to press outlets stating the ruling is a preliminary court action and that the company is confident it will prevail in the case. A company spokesman told the Wall Street Journal that Pursuit Partners is a sophisticated investor that was fully aware it was purchasing troubled securities at deep discounts, and that it described the instruments itself in unflattering terms.

Observers immediately speculated that Connecticut”™s complex-litigation docket could be flooded with similar lawsuits given Blawie”™s ruling, a process that would likely take years to sort through.