UBS Will Contest RMBS Civil Complaint Filed by United States Department of Justice
November 08 2018 - 07:20PM
Business Wire
UBS is confident in its legal position, based on the facts
and the law
Regulatory News:
The United States Department of Justice ("DOJ") today filed a
civil complaint in the U.S. District Court for the Eastern District
of New York related to UBS's issuance, underwriting and sale of
residential mortgage-backed securities ("RMBS") more than a decade
ago. The complaint seeks unspecified monetary civil penalties under
the Financial Institutions Reform, Recovery, and Enforcement Act
("FIRREA") regarding transactions that date back to 2006 and
2007.
The DOJ’s claims are not supported by the facts or the law. UBS
will contest the complaint vigorously in the interest of its
shareholders. UBS is confident in its legal position and has been
fully prepared for some time to defend itself in court.
UBS intends to rely on the following significant facts, among
others, in its defense of this action and expects those facts to be
substantiated in the course of the proceedings:
UBS Suffered Massive Losses on U.S. Mortgage-Related Assets,
Including the RMBS Cited in the Complaint, Negating any Inference
of Fraud
- UBS invested USD 100 billion in U.S.
residential mortgage-related assets and lost more than USD 45
billion when the housing market collapsed, including losses of
nearly USD 900 million on the RMBS referred to in the complaint –
more than the losses on the certificates UBS sold to any other
single investor. This fact alone negates any inference that UBS
engaged in an intentional fraud that was flatly against its own
economic interest.
UBS Was Not a Significant Originator of U.S. Residential
Mortgages
- UBS originated only a miniscule
proportion of U.S. residential mortgages between 2005 and 2007 (USD
1.5 billion of more than USD 5 trillion) and did not originate any
subprime loans. The vast majority of loans underlying the 40 RMBS
listed in the complaint were originated by other financial
institutions, many of which issued their own RMBS. UBS stopped
issuing RMBS in 2007.
UBS Fulfilled its Disclosure Obligations to Sophisticated
RMBS Investors
- The RMBS cited in the complaint were
purchased by some of the biggest financial institutions in the
world and other highly sophisticated investors who had access to
loan data from a range of sources. In its offering documents, UBS
repeatedly disclosed the risks of investing in the RMBS and made
clear that investors could lose money if home prices declined.
Any Penalty Sought by the DOJ Would be Limited, at Most, to
Losses to FIFIs
- Following the savings and loan crisis,
Congress enacted FIRREA in 1989 to protect federally-insured
financial institutions (“FIFI”) and their depositors from insider
abuse, and it was used for this purpose for two decades. This law
was never intended to cover all sales of securities to all
investors merely because a FIFI is among the investors or other
parties involved in the transaction, as the DOJ seeks to misapply
it here. UBS believes that FIRREA limits any claim against UBS to
sales of the RMBS to FIFIs, who purchased only a small fraction of
the certificates sold by UBS. The current losses on all
certificates sold to FIFIs are lower than UBS’s own losses of
nearly USD 900m in these same RMBS.
The Alleged Misrepresentations Did Not Cause RMBS Investor
Losses
- To obtain a FIRREA penalty based on
investor losses, the DOJ must persuade the court to accept not only
that UBS (despite its own massive losses on U.S. mortgage-related
investments) engaged in intentional fraud but also that the alleged
misrepresentations caused losses to investors in these RMBS. This
theory flies in the face of the history of the housing crisis,
which began with an unprecedented and unexpectedly severe collapse
in U.S. home prices, triggering mortgage defaults and RMBS losses.
The historic, market-wide downturn is commonly understood to be the
result of a range of factors that created a housing bubble,
including low interest rates and government policy.
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Notice to investors
This document and the information contained herein are provided
solely for information purposes, and are not to be construed as a
solicitation of an offer to buy or sell any securities or other
financial instruments in Switzerland, the United States or any
other jurisdiction. No investment decision relating to securities
of or relating to UBS Group AG, UBS AG or their affiliates should
be made on the basis of this document. Refer to UBS’s third quarter
2018 report and its Annual Report on Form 20-F for the year ended
31 December 2017 for additional information. These reports are
available at www.ubs.com/investors.
Cautionary statement regarding forward-looking
statements
This document contains statements that constitute
forward-looking statements. While these statements represent UBS’s
judgments and expectations concerning the matters described, a
number of risks, uncertainties and other important factors could
cause actual developments and results to differ materially from
UBS’s expectations. Additional information about those factors is
set forth in documents furnished and filings made by UBS with the
US Securities and Exchange Commission, including the third quarter
2018 report and the Annual Report on Form 20-F for the year ended
31 December 2017. UBS undertakes no obligation to update the
information contained herein. UBS specifically prohibits the
redistribution or reproduction of this material in whole or in part
without the prior written permission of UBS, and UBS accepts no
liability whatsoever for the actions of third parties in this
respect.
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