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Home > Cases > UBS > Did UBS Overvalue Mortgage Bonds? Wall Street Probes Expand; Criminal Charges Could Be Filed

Did UBS Overvalue Mortgage Bonds? Wall Street Probes Expand; Criminal Charges Could Be Filed

On February 2, 2008, Kara Scannell, Anita Raghavan and Amir Eßfrati reported in the Wall Street Journal that UBS AG is now under federal criminal investigation for misleading investors about the value of its mortgage bonds. This is what's new for UBS:

  • A U.S. attorney's office investigation as to whether UBS AG criminally misled investors by posting inflated prices of its mortgage bond holdings, despite knowing that the valuations had dropped.
  • An SEC probe into similar “mismarking” issues surrounding the bank's massive holdings of mortgage securities. The SEC case has recently been upgraded to a formal investigation.
  • Still more writedowns, bringing the bank's total losses to an estimated $18.4 billion for 2007.

All this as UBS AG executives head into their “Extraordinary General Meeting” with shareholders on February 27. At that meeting, UBS will seek approval for an $11.5 billion bailout from Asian and Middle Eastern investors.

Extraordinary indeed -- though hardly unique, when you consider the pressure now coming to bear on UBS AG's Wall Street peers. A quick inventory of the problem paints a bleak picture as the “Subprime Cleanup” gathers steam:

  • Numerous criminal investigations of suspected fraud in the origination, re-packaging, and selling of mortgage-related products are now underway at the FBI and the offices of federal prosecutors. Thus far, no criminal charges have been filed.
  • The Securities and Exchange Commission recently upgraded probes of UBS and Merrill Lynch & Co. into formal investigations. At issue is whether the Wall Street firms deliberately misvalued, or “mismarked,” massive holdings of mortgage securities. The SEC gains broad subpoena power once a formal investigation has been launched.
  • According to the SEC, the Merrill Lynch and UBS probes are among roughly 36 SEC investigations recently opened and tied to the downturn of the subprime mortgage market.
  • Federal criminal prosecutors continue to investigate the collapse of two internal hedge funds at Wall Street firm Bear Stearns Cos.
  • All this, in the wake of more than $100 billion in write-downs on mortgage-related assets, announced by financial firms during the past several months.

Should federal prosecutors find ample proof that UBS made materially misleading statements about securities, and proof that they did it with the intent to deceive, their next step would be to file criminal charges. A highly visible criminal trial would certainly deal the company's reputation a heavy blow.

However, the resulting civil action could be far more costly and massive in scope. If UBS did in fact unload risky mortgage securities off on customers at inflated prices, then large portions of the UBS customer base will have suffered damages.

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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