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UBS Overview

Our subprime team is currently investigating UBS and its practices in selling, valuing and pricing securities. In recent years, UBS has been one of the leading underwriters of mortgage-backed securities and collateralized debt obligations. The firm has also sponsored hundreds of mutual funds, both public and private and domestic and international, many of which appear to have been invested in mortgage-backed and asset-backed securities. Now UBS's pricings and valuations of these instruments have become highly suspect and the harm to investors throughout the world could be significant. Have UBS's clients and investors been overcharged for subprime securities they purchased? Have they paid too much in management fees? Were these securities sold as safe, low risk, AAA-rated securities? Are they being told the true value of their holdings? These are but a few of the questions we hope to answer.

As reported in The Wall Street Journal earlier this month, the U.S. Attorney's Office in Brooklyn is investigating “whether UBS AG misled investors by booking inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped.” If the probe yields evidence that the firm deliberately misvalued or mismarked its holdings of mortgage-backed securities, UBS could face serious criminal charges. To add to the firm's troubles, the SEC recently expanded its probe of UBS's pricing of these securities into a formal investigation. The focus of the SEC's investigation of UBS -- as well as others on Wall Street — is whether firms had an obligation to tell investors sooner rather than later about the declining value of these securities and how they priced them on their books.

UBS has been under a cloud of suspicion regarding its pricing and valuation of mortgage-backed securities since May 2007 when it abruptly shut down Dillon Read Capital Management, its in-house hedge fund, following $124 million in losses from investments in risky subprime mortgage loans. The hedge fund's demise led many on Wall Street to question UBS's oversight policies, particularly when John Niblo, a hedge fund manager at the firm, was terminated several months later.

According to an article by Susan Pulliam, Randall Smith and Michael Siconolfi in The Wall Street Journal on October 12, 2007, UBS was furious when Mr. Niblo slashed his fund's valuation of securities tied to subprime mortgages by approximately 20%, or nearly $100 million, while the firm was valuing similar securities on its books at much higher prices. According to the reporters, traders who witnessed the event say that after Ramesh Chari, another UBS manager, complained about Mr. Niblo's valuations and asked him to explain, Mr. Niblo had a question of his own. How could UBS value the securities at a higher level “if we can't sell them at these prices?” The SEC is investigating, among other things, the situation involving Mr. Niblo.

Valuation of mortgage-backed securities and other derivative products whose prices are not published — and whose true value is largely unknown — has become a tricky process fraught with uncertainty for all the leading firms. Statement 157 of the Financial Accounting Standards Board, which was adopted by most large firms in 2007, provides investors with a better understanding of securities that can be priced based on readily available quotes and those that may be harder to value.

According to Statement 157, Level 1 pricing — “marking to market” — is the most precise because valuations are available on computer screens and based on “quoted prices in active markets for identical assets or liabilities.” Level 1 pricing is typically used for publicly-traded stocks, listed futures and options, government and agency bonds, and mutual funds. Level 2 pricing — “marking to matrix” — is less precise because valuations are based on “observable market data” for similar or comparable assets. Not all prices are accessible on computer screens. Some mortgage and asset-backed securities and derivatives not publicly traded and infrequently traded corporate and municipal bonds, and structured notes, among other securities, fall into this category. Level 3 “marking to model” — involves the most speculation and guesswork. Valuations are based on management's best judgment and “own assumptions about the assumptions market participants would use in pricing the asset.” Pricing models based on estimates of future cash flows or other formulas are used to determine prices. Most asset-backed bonds, collateralized debt obligations and other subprime securities are in this category.

Needless to say, prices for mortgage-backed securities and related investments based on Level 2 “marking to matrix” and Level 3 “marking to model” are highly subjective and far less reliable. UBS sponsors hundreds of mutual funds in the U.S. and worldwide, many of which invest primarily in mortgage-backed and other asset-backed securities, and include subprime-investments. For example, the UBS U.S. Securitized Mortgage Relationship Fund, which acknowledged that, for the six-month period ended June 30, 2007, its portfolio performance was affected adversely by subprime mortgage defaults, is an example of only one such UBS fund. In light of UBS's problems with the Dillon Read Capital Management hedge fund and valuation dispute with Mr. Niblo, both the pricing and valuation problems of UBS mutual funds and subprime securities are suspect.

Eager to put the best face possible on valuations of these securities, as the situation at UBS involving Mr. Niblo illustrates, firms are understandably reluctant to lower the price, despite clear signs that the market has shifted and it is worth less than the price carried on its books. Because bonuses are often based on the value of a broker's holdings, some managers are unwilling to reduce the valuation.

Over the past few months, as the collapse of the subprime market intensified and the credit crisis deepened, firms have been forced to face reality and take their losses. UBS is no exception. It recently took its third write-down on mortgage-related assets in only four months. UBS's total in write-downs for 2007: a staggering $18.4 billion.

Despite all the turmoil and confusion over what mortgage-backed securities and related investments are really worth, one thing is clear: the collapse of the subprime mortgage market has resulted in pricing that is inaccurate, and unrealistic, if not blatantly false. This adversely impacts all investors — institutions and individuals alike, both domestic and international — and the implications are enormous. For example, investors in these products may have paid too much or otherwise been overcharged through inflated management fees, and hedge fund investors may have missed an opportunity to mitigate their losses.

The fallout from the subprime chaos at UBS has been extensive. Since last July, many UBS executives have left the firm including the former chief executive, the chief financial officer, the head of investment banking and the fixed-income chief. The fallout from the investor suits that will almost certainly follow remains to be seen.

In the summer of 2007, our group, who individually and collectively have extensive experience in representing investors against Wall Street, formed an affiliation. Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage related investment losses. Contact us.


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