UBS fraud case is ‘frankly, terrifying’

One of Debevoise & Plimpton’s top litigators has swung into action on behalf of beleaguered investment bank UBS.

UBS fraud case is ‘frankly, terrifying’DEBEVOISE & PLIMPTON

Top litigator’s hire highlights gravity of charges

One of Debevoise & Plimpton’s top litigators has swung into action on behalf of beleaguered investment bank UBS.

Mary Jo White, the chair of Debevoise’s litigation department, is one of the best-known white-­collar crime lawyers in the US. A former US attorney for the Southern District of New York, White oversaw the prosecutions of some of the highest-profile national and ­international cases while in office.

As one New York partner at a rival firm puts it: “If I had an issue myself, I’d turn to Mary Jo”.

Although White would not comment on her most recent instruction, her hire by UBS is an indication of the gravity of the case and of the bank’s expectation that criminal, as well as civil, charges are likely to be brought against it. Certainly, with the UBS case it would appear that White will have her hands full.

On Thursday 24 July, New York State Attorney General Andrew Cuomo filed charges against UBS Securities and UBS Financial Services (collectively UBS), accusing the Swiss bank of a “multibillion-dollar consumer and securities fraud”.

The allegations centre on the sale of auction-rate securities (ARS), which are shares or debt instruments for which the interest rate is reset at regular intervals, and which were marketed by the bank as being so liquid they were equivalent to cash.

A statement from the Attorney General’s Office says UBS has been “falsely selling and marketing auction-rate securities as safe, highly liquid and cash-equivalent securities”.

It adds that these representations were deceptive, “as the ­auction-rate securities market came under tremendous strain, leaving the ­securities with mounting ­liquidity risks that eventually blocked thousands of customers across New York and the nation from accessing their holdings”.

According to the Attorney ­General’s Office, UBS customers have been left holding more than $25bn (£12.63bn) in illiquid, long-term paper as a result of the bank’s “fraudulent misrepresentations and illegal conduct”.

In addition, Cuomo’s investigation has uncovered evidence, ­including internal emails, that as the securities market started to ­collapse, several of UBS’s top ­executives sold a total of $21m (£10.61m) in personal holdings of ARS, while continuing to market the securities to its consumers.

“Not only is UBS guilty of ­committing a flagrant breach of trust between the bank and its customers, its top executives jumped ship as soon the securities market started to collapse, leaving thousands of ­customers holding the bag,” says Cuomo. “Today we bring the first nationwide lawsuit against UBS, seeking to recover billions of dollars for customers and sending a resounding message to the rest of the industry that this type of deceptive behaviour will not be tolerated.”

In a statement, UBS says it ­categorically rejects any claim that it engaged in a widespread campaign to move ARS inventory from its own books and into private client accounts. It adds that it is “frustrating” that Cuomo has filed the ­complaint while it was “fully engaged in good faith negotiations with his office to bring liquidity to our clients holding auction-rate securities”.

Across New York it appears that Cuomo’s “resounding message” comment has resonated with other leading financial institutions.

Calls by The Lawyer to a wide range of firms ­suggest that, at the time of going to press, they were gearing up for the possibility of similar charges being brought against their financial institution clients.

Firms understood to be preparing to advise clients in relation to the ARS row include Paul Weiss Rifkind Wharton & Garrison and WilmerHale (advising Citigroup), Sullivan & Cromwell (Goldman Sachs) and Skadden Arps Slate Meagher & Flom (Merrill Lynch). Several other firms contacted, including Allen & Overy and ­Chadbourne & Parke, refused to comment.

The ARS row has already grown into a wider issue than solely Cuomo’s New York case. In Texas government authorities have ­indicated they will revoke UBS’s licence to act as a securities dealer in the state until the bank returns the money Texas investors have lost.

As one New York partner close to the ARS case puts it: “The overreaching by the regulators in regard to this issue is unprecedented and, frankly, terrifying”.

Sidley hire boosts london hedge funds offering

Sidley Austin has continued the expansion of its London hedge funds practice with the hire of a lawyer from New York firm Tannenbaum Helpern Syracuse & Hirschtritt.

US lawyer Barry Breen joined Sidley’s London office earlier this month as counsel in the investment funds, advisers and derivatives practice. His arrival not only highlights Sidley’s push to grow its international hedge funds practice, but raises questions about the future of Tannenbaum’s London office.

Breen, an associate at Tannenbaum, was the de facto head of the firm’s satellite London outpost, which is understood to have been left with just two lawyers following his departure.

However, the firm’s US head Michael Tannenbaum dismissed concerns that London was about to close. “Absolutely not,” he said. “The office is profitable.”

At Sidley Breen has joined a team that is looking to grow rapidly to match the firm’s hedge fund strength in the US and Asia. “A number of my clients had been looking for more global coverage, particularly in relation to Asia,” he says. “This is no criticism of my previous firm, but my ability to service those clients should be noticeably enhanced by my move to Sidley.”

The past six months have seen Sidley significantly ramp up its hedge fund capabilities in London. In April it recruited hedge funds and financial markets partner Bruce Gardner from SJ Berwin to lead the US firm’s hedge fund practice in Europe, while two months earlier it hired David Hinds, a Covington & Burling partner who joined the tax practice in London to focus on investment funds work.

“Sidley in the US has a pre-eminent funds practice, but is unusual in that, unlike some of the other top US hedge fund practices, it can also do the Asian piece,” says Gardner. “Also, it’s unusual in that there are many other global law firms, but not that many in which investment funds and hedge funds are as close to the core of the firm.”

Gardner anticipates that the firm’s London recruitment push would see its hedge fund team grow to around a dozen lawyers in the next six months.