US govt insists NY Court has jurisdiction over UBS AG in RMBS sale fraud case

Maria Nikolova

The complaint in this action asserts five claims for relief against UBS AG, based on the sale of residential mortgage-backed securities in 2006 and 2007.

The proceedings launched by the United States Government against UBS AG, alleging that the bank and several of its affiliates defrauded investors in connection with the sale of residential mortgage-backed securities (RMBS), continue at the New York Eastern District Court.

Let’s recall that, according to 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. In particular, 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. In the end, the 40 RMBS sustained substantial losses.

On December 27, 2019, the United States Government filed a Letter with the Court seeking to reiterate its stance that the Court has personal jurisdiction over UBS AG for the non-Home Finance Deals based on the Court’s personal jurisdiction over UBS AG for the Home Finance Deals.

In the document, seen by FinanceFeeds, the US Government argues that there is no basis in law for jurisdictional parsing of the United States’ five claims for relief in this action, each of which asserts that UBS AG has engaged in conduct in violation of a predicate offense of the Financial Institutions Reform, Recovery, and Enforcement Act, 12 U.S.C. § 1833a (FIRREA). A plaintiff need not establish personal jurisdiction as to each allegation in a complaint, but must only establish the Court’s jurisdiction with respect to each claim asserted, and the United States has done so based on the Home Finance-related allegations for all claims against UBS AG, the plaintiff says.

Moreover, as alleged in the Complaint, UBS AG was involved in actionable conduct as to all forty residential mortgage-backed securities that are the subject of this case (the “Subject Deals”).

The factual record to date includes evidence showing that UBS AG was pervasively involved in all aspects of the Subject Deals, not just the Home Finance deals, and exercised control over its subsidiaries in the US with respect to the RMBS business based in New York, the Government notes. For example, the Complaint cites an internal memorandum elaborating on UBS’ “business’ intent” to “fully distribute all risk” onto others in its RMBS deals. Further, the defendants have represented publicly to a federal court that “UBS Investment Bank is the name of an unincorporated division of UBS AG.”

The Government adds that the defendants have essentially conceded that UBS AG was involved in all of its RMBS deals by arguing lack of scienter because of the actions of UBS AG. Specifically, defendants assert that UBS AG lost money in various businesses across the UBS corporate family during the financial crisis, which negates fraudulent intent. According to the Government, the defendants cannot logically assert on one hand that UBS AG was not involved in the actions of its subsidiaries, and then, on the other hand, assert that UBS AG’s scienter across its entire corporate family is exculpatory.

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