Fraud, bribery, misrepresentation and corruption—derivatives contract set aside

Fraud, bribery, misrepresentation and corruption—derivatives contract set aside

What are the implications of the recent UBS ruling around derivatives contracts?

Original news

UBS AG (London Branch) and another v Kommunale Wasserwerke Leipzig Gmbh; UBS Ltd v Depfa Bank plc; UBS AG (London Branch) v Landesbank Baden-Wurttemberg

A Leipzig municipal water company (KWL) sold credit protection to the investment bank (UBS) and to two other banks (LBBW and Depfa) on four portfolios of investment grade bonds and other securities. It did so by means of a series of derivative products known as single tranche collateralised debt obligations (STCDOs). Defaults occurred following the global financial crisis of 2008–9, and UBS, LBBW and Depfa sought payment of sums due under the STCDOs. The Commercial Court made rulings concerning, among other things, the availability of rescission to the parties.

What were the facts of the case?

In 2006 and 2007, UBS entered into derivative contracts with KWL. Under these contracts, KWL sold credit protection on four portfolios of investment grade bonds and other securities to UBS and LBBW and Depfa via STCDOs. Under the terms of these contracts, if any ten reference entities defaulted in eight to ten years, KWL would be liable to pay the banks millions of dollars. In 2008 and 2009, during the financial crisis, there were significant defaults on the underlying reference entities and KWL was, therefore, liable to pay significant amounts to UBS, LBBW and Depfa.

Fraudulent statements were made by H, a director of KWL in the process of setting up the STCDOs. H had been bribed by two consultants at Value Partners (VP), who purported to be KWL's financial advisers. UBS was aware of the conflict of interest that VP had in acting for KWL—for example, VP emailed its key contact at UBS, Steven Bracy (B), and asked for compensation for recommending UBS Global Asset Manager (UBS GAM) as its portfolio manager, which B did not notify KWL about. KWL also alleged that UBS had made fraudulent misrepresentations

Subscription Form

Related Articles:
Latest Articles:

Already a subscriber? Login
RELX (UK) Limited, trading as LexisNexis, and our LexisNexis Legal & Professional group companies will contact you to confirm your email address. You can manage your communication preferences via our Preference Centre. You can learn more about how we handle your personal data and your rights by reviewing our  Privacy Policy.

Access this article and thousands of others like it free by subscribing to our blog.

Read full article

Already a subscriber? Login

About the author:

Meet Emma:

1.Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.Likes ballet, playing the harp and holidays

3.Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.