Robert Giuffra, partner at Sullivan & Cromwell

“The last bank standing.”

That's how Sullivan & Cromwell partner Robert Giuffra Jr. describes his client UBS AG, which is doing something no other big bank has dared: It's refusing to settle residential mortgage backed securities claims with the Department of Justice.

One after another, mega-banks have paid billions in civil penalties to settle alleged violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA. Among them: J.P. Morgan ($2 billion), Citibank ($4 billion), Bank of America ($5 billion), Morgan Stanley ($2.6 billion), Goldman Sachs ($2.385 billion), Deutsche Bank ($3.1 billion); Credit Suisse ($2.48 billion) and Barclays ($2 billion).

Last week, DOJ sued UBS, seeking unspecified damages for allegedly defrauding investors in connection with the sale of residential mortgage-backed securities more than a decade ago.

“UBS knowingly and intentionally misrepresented key characteristics of the loans it securitized in the subject deals in order to conceal the fact that these loans were much riskier and much more likely to default than UBS represented to investors,” states the 208-page complaint filed in the Eastern District of New York.

In part, DOJ is relying on FIRREA because it's got a 10-year statute of limitations. But Giuffra argues the statute was never intended to be used the way the government is wielding it now—“as a thermonuclear securities law,” he said in an interview from Switzerland.

It's not that UBS hasn't settled any RMBS government cases. The Swiss banking giant paid $885 million in 2013 to the Federal Housing Finance Agency for Fannie Mae and Freddie Mac-related claims.

But it's notable that the company got a pass from the U.S. Securities and Exchange Commission, which declined to take any action against UBS, even as it slammed other financial institutions

UBS argues it's different. For one thing, as the company noted in a press release, it invested $100 billion in U.S. residential mortgage-related assets but lost more than $45 billion when the housing market collapsed.

The complaint focuses on 40 specific deals—but UBS says it was the biggest loser in those transactions, taking a $900 million hit. “This fact alone negates any inference that UBS engaged in an intentional fraud that was flatly against its own economic interest,” the company said.

Moreover, UBS “originated only a miniscule proportion of U.S. residential mortgages between 2005 and 2007,” the bank said, and didn't originate any subprime loans. That meant it was not as well-positioned to know about the underlying quality (or lack thereof) of the mortgages compared to some rivals.  (Bank of America/ Countrywide/ Franklin Financial, for example, originated almost $2 trillion in mortgages from 2005 to 2007, compared to $1.5 billion for UBS.)

However, DOJ points to damning internal UBS communications that suggest the bank was well aware that the underlying mortgages did not comply with representations made to investors.

One UBS trader, for example, called some loans “quite possibly better than little beside leprosy spores,” according to the complaint. Another called a pool of loans “a bag of sh[*]t.” And another a 2006 instant message conversation said “our crack due diligence effort is a joke.”

Still, Giuffra has an excellent track record defending UBS. In 2014, The American Lawyer named him a Litigator of the Year for defeating a massive securities class action against the bank.

“Sometimes it pays to settle—and sometimes it pays to fight,” he said. This time, UBS “is committed to litigate.”

 

Quinn Emanuel Team Scores $29M RMBS Verdict

Another RMBS case came to a close last week, when a team of litigators from Quinn Emanuel Urquhart & Sullivan led by William Price, Peter Calamari and Isaac Nesser scored a $28.7 million verdict on behalf of Residential Funding Company (now ResCap Liquidating Trust).

On Nov. 8, a federal jury in Minnesota socked Home Loan Center Inc., which is represented by Williams & Connolly, with the penalty after a 16-day trial. With attorneys' fees and interest, the payout could be more like $60 million.

I wrote about the case on the eve of trial. Quinn client RFC was a middleman that would buy loans from mortgage lenders, package them and resell them as securities to investors.  Turns out, many of the underlying loans were garbage. RFC got hammered by the banks it sold the loans to, and is now going after the mortgage lenders that sold it the loans in the first place.

RFC argued that under the terms of their contracts, the originating lenders agreed to assume liability for any misrepresentations for breaches, regardless of their knowledge or RFC's knowledge.

In part, the Quinn team's success hinged on convincing U.S. District Judge Susan Richard Nelson to eliminate many of Home Loan's expert and fact witnesses.

To date, Quinn lawyers have won 80 settlements for RFC, recouping $1.2 billion. Two more trials, against Standard Pacific and UAMC, are scheduled for January.

 

 

 

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