Opinion

Alison Frankel

UBS ‘likely’ to settle with FHFA before January trial: bank co-defendants

Alison Frankel
Jul 17, 2013 19:03 UTC

Remember UBS’s attempt to play what it considered a get-out-of-jail-free card in the megabillions litigation over mortgage-backed securities UBS and more than a dozen other banks sold to Fannie Mae and Freddie Mac? UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom came up with an argument that could have decimated claims against all of the banks: When Congress passed the Housing and Economic Recovery Act of 2008 and established the Federal Housing Finance Agency as a conservator for Fannie Mae and Freddie Mac, UBS said, lawmakers explicitly extended the one-year statute of limitations on federal securities claims – but neglected to extend, or even mention, the three-year statute of repose. UBS argued that FHFA’s suits, which in the aggregate asserted claims on more than $300 billion in MBS, were untimely because they were filed after the statute of repose expired.

The judge overseeing almost all of the FHFA MBS suits, U.S. District Judge Denise Cote, denied UBS’s motion to dismiss in 2012. The bank, she said, was splitting hairs: Congress clearly intended to give FHFA a chance to evaluate its potential causes of action and believed it was doing so when it extended the statute of limitations. The judge subsequently applied the same reasoning to other banks’ motions to dismiss FHFA suits on timeliness grounds, but she also granted UBS permission to take the issue to the 2nd Circuit Court of Appeals. Cote said that whichever way the appeals court ruled, its decision would help resolve the FHFA litigation. If she were reversed, FHFA’s claims would be drastically narrowed; if she were upheld, the banks would be more inclined to settle.

In April, as you probably recall, a three-judge 2nd Circuit panel affirmed Judge Cote. In the appeal, UBS stood alone among the FHFA bank defendants as a party, though the other banks filed an amicus brief endorsing UBS’s position that Congress failed to extend the statute of repose. Since the 2nd Circuit’s ruling, UBS and FHFA have been engaged in whirlwind discovery, which is scheduled to close in September. Judge Cote has set an inviolable January trial date for FHFA’s case against UBS.

That looming trial date has cause the other FHFA bank defendants to worry that UBS will settle with the conservator before the statute of repose issue hits the U.S. Supreme Court’s docket. In an emergency petition filed Monday at the 2nd Circuit (and first spotted by my Reuters colleague Karen Freifeld), the other banks with cases before Judge Cote asked the appeals court to permit them to intervene in the UBS case for the purposes of submitting a certiorari petition to the Supreme Court. The deadline for that petition is Sept. 3, the banks wrote. They want to intervene “to ensure that even if – as is likely – the UBS action is resolved before a petition is filed or before consideration of that case by the Supreme Court, (they) can still seek timely review.”

I thought it was rather bold of UBS’s fellow defendants to predict its imminent FHFA settlement, so I emailed UBS lawyers at Skadden for a reaction. Through a firm representative, they declined to comment. I also reached out to FHFA counsel at Quinn Emanuel Urquhart & Sullivan and to Barclays’ counsel at Sullivan & Cromwell, who took the lead on the other banks’ emergency petition at the 2nd Circuit. They didn’t get back to me.

2nd Circuit delivers more bad news for sophisticated investors

Alison Frankel
Apr 23, 2012 11:56 UTC

Remember U.S. District Judge Victor Marrero‘s opus last month in a hedge fund case against Goldman Sachs? The Manhattan federal judge refused to dismiss claims that Goldman duped the fund, Dodona, into investing in doomed-to-fail Hudson collateralized debt obligations. In 64 vivid pages, Marrero detailed the fund’s allegations that Goldman engaged in a sweeping effort, initiated by CFO David Viniar, to shed its exposure to subprime mortgages — and simultaneously to take advantage of clients who were slower to perceive the looming collapse of the mortgage-backed securities market. Marrero described the alleged scheme as “not only reckless, but bordering on cynical.”

What a difference a judge makes. Last September, in a parallel case involving Goldman’s Davis Square CDOs, U.S. District Judge William Pauley, also of Manhattan, needed only 19 pages to dismiss fraud and negligent misrepresentation claims by Germany’s Landesbank Baden-Wuerttemberg. On Thursday, without even bothering to write a precedential opinion, a three-judge panel of the 2nd Circuit Court of Appeals upheld the dismissal. Chief Judge Dennis Jacobs and Judges Rosemary Pooler and Susan Carney agreed with Pauley that the German bank was a sophisticated investor and received plenty of warnings about the risk of investing in the Davis CDOs.

“The relationship between Landesbank and the defendants was that of buyer and seller in a standard arm’s length transaction; and by its own representations Landesbank possessed sufficient expertise to evaluate the risks of its investment,” the 2nd Circuit wrote in a summary order. “The complaint therefore fails to plead justifiable reliance.” Landesbank’s counsel at Motley Rice had notified the 2nd Circuit of Marrero’s ruling, in a letter spelling out the judge’s conclusion that even if Dodona was a sophisticated investor, its reasonable reliance on Goldman’s representations isn’t precluded as a matter of law. By giving Landesbank’s argument such short shrift, the federal appeals court clearly believes the contrary.

Bond insurers drop MBS letter bomb on UBS

Alison Frankel
Dec 2, 2011 15:44 UTC

Last month, as U.S. banks began reporting their third-quarter financials, I noted that the banks had beefed up their disclosure of potential liability for mortgage-backed securities activity. Morgan Stanley revealed that it had received a demand letter from Gibbs & Bruns, the firm that represents the big funds that negotiated the proposed $8.5 billion MBS breach-of-contract settlement with Bank of America. Goldman upped its reported MBS exposure to $15.8 billion, from a mere $485 million in the second quarter. The new emphasis on disclosure, I said, was partly the result of more claims, but also partly due to pressure from the Securities and Exchange Commission and the Public Company Accounting Oversight Board to improve MBS disclosures.

The bond insurers’ trade group, the Association of Financial Guaranty Insurers, has also been agitating for banks to acknowledge their MBS exposure — and particularly their exposure to MBS breach-of-contract (or put-back) claims. In September 2010 AFGI sent a blistering letter asserting that Bank of America’s MBS put-back liability to its members was more than $10 billion. This September the bond insurers targeted Credit Suisse, which, according to AFGI, had failed to account for billions in put-back claims.

Late Wednesday AFGI struck again. The recipient this time was UBS. According to the letter AFGI sent to UBS CEO Sergio Ermotti, the Swiss bank has reported a $93 million reserve for put-back claims in its most recent financial report — even though it has received more than $800 million in put-back claims from just one bond insurer, and that insurer (presumably Assured Guaranty) has indicated its intention of demanding a total of $4 billion in put-backs from UBS.

Picard drops $2bl in claims against UBS? Um, no, he doesn’t

Alison Frankel
Jul 20, 2011 22:44 UTC

The damages claims in Irving Picard’s pursuit of the banks that allegedly helped Ponzi schemer Bernard Madoff are so outsized that even a simple two-page letter from a federal judge can lead to a $2 billion kerfuffle. On Tuesday, Manhattan federal district court judge Colleen McMahon sent a letter to lawyers for Picard, the bankruptcy trustee for Bernard L. Madoff Investment Securities, and to lawyers for UBS, which is a defendant in two of Picard’s suits. UBS’s counsel at Gibson, Dunn & Crutcher had moved in June to transfer two Picard suits naming the bank as a defendant out of bankruptcy court and into federal court; Judge McMahon, who is overseeing Picard’s case against JPMorgan Chase, agreed to take the cases on July 7 and began requesting information, by letter, from Picard counsel at Baker & Hostetler and UBS counsel at Gibson Dunn.

To understand Judge McMahon’s July 19 letter — and how it was misinterpreted — it’s important to know that in the two actions naming UBS defendants, Picard is asserting different causes of action and seeking different amounts of money. In the case known as Luxalpha, Picard and Baker & Hostetler claim that UBS breached its fiduciary duty and aided and abetted fraud. That suit demands $2 billion from UBS and other defendants. The other case, known as LIF, is a clawback action demanding the return of all the money the bank and other defendants redeemed from Madoff or earned in fees, a total of $550 million, according to Picard. Though the press release announcing the LIF suit refers to “alleged financial fraud” by UBS, the suit actually claims only unjust enrichment and another common-law cause of action as an alternative to the clawback theory.

In a July 14 letter, Judge McMahon told Baker & Hostetler and Gibson Dunn that she needed more explanation of how the LIF and Luxalpha cases intersected and overlapped, and warned the lawyers that she wasn’t going to slow down the JPMorgan case to address complications in the UBS suit. In response, the Picard lawyers decided to simplify matters, reasoning that if they dropped the alternative-theory common law claims in the $550 million LIF case, there would be no reason for the case to stay in federal court. Picard could simply go after the $550 million in a bankruptcy court clawback action.

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