UBS Sued For CDO Scam
San Francisco-based Bank of the West has accused UBS of manipulating rights associated with collateralized debt obligations (CDOs) in a manner that defrauded Bank of the West and caused it to lose $95 million. Specifically, Bank of the West alleges that the Swiss banking giant secretly purchased and retained the senior controlling notes of approximately $1.3 billion in collateralized debt obligations (CDOs) and then entered into credit default swaps with another collateralized debt obligation UBS had created called "TABS 2007-7." According to the complaint, this maneuver gave UBS a dual role as credit default swap counterparty and owner of the senior notes and gave UBS a financial incentive to demand liquidation of TABS, thereby forcing TABS to pay UBS as the credit default swap counterparty. After establishing this "scheme" in which Bank of the West invested over $95 million, UBS relied on a “highly questionable” event of default to liquidate the CDO at what Bank of the West contends were low prices and to seize Bank of the West's $95 million investment and over $900 million that others had invested in TABS.
According to the complaint, UBS hatched this scheme in order to be able to misrepresent to its shareholders and to regulators and creditors that it had reduced its CDO exposure by $2.3 billion, which Bank of the West claims was an exaggeration.
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