Justice Department Sues UBS Over Alleged RMBS Misrepresentations

The agency contends the alleged actions by UBS related to residential mortgage-backed securities contributed to the 2008 financial crisis, but UBS has fired back against the allegations.

The U.S. Justice Department filed a civil complaint against UBS AG and several of its United States affiliates, alleging that UBS defrauded investors throughout the United States and the world in connection with its sale of residential mortgage-backed securities (RMBS) from 2006 through 2007.

RMBS’ are often used by defined benefit (DB) plan sponsors in their portfolios.

As detailed in the complaint, from 2006 through 2007, UBS misled investors about the quality of billions of dollars in subprime and Alt-A mortgage loans backing 40 RMBS deals. Specifically, the complaint alleges, in publicly-filed offering documents, UBS knowingly misrepresented key characteristics of the loans, thereby concealing the fact that the loans were much riskier and much more likely to default than UBS represented. Ultimately, the 40 RMBS sustained catastrophic losses. 

“The complaint alleges that instead of ensuring that their representations to investors were accurate and transparent, UBS affirmatively misled investors and withheld crucial information from them about the loans in its deals,” stated United States Attorney Byung J. Pak in an announcement.  “UBS allegedly placed a higher priority on selling bonds and making profits than accurately representing the quality of the underlying loans to investors.  These practices resulted in massive losses to investors, harmed homeowners, and ultimately jeopardized the banking system.”

However, UBS has fired back, saying the Justice Department’s claims are not supported by the facts or the law.

UBS says it intends to rely on certain facts to defend itself; for one, that it suffered massive losses on U.S. mortgage-related assets, including the RMBS cited in the complaint, negating any inference of fraud. UBS says it was not a significant originator of U.S residential mortgages; it fulfilled its obligations to sophisticated RMBS investors; any penalty sought by the Justice Department would be limited, at most, to losses to federally insured financial institutions; and the alleged misrepresentations did not cause RMBS investor losses.

More details of UBS’ intended defense can be found in this announcement.