2 Amended Consolidated Securities Class Action Complaint 05/08/2009

563 Pages·2009·25.08 MB·English

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
IN RE UBS AG SECURITIES LITIGATION MASTER FILE NO. 1:07-CV-11225-RJS
AMENDED CONSOLIDATED SECURITIES CLASS ACTION COMPLAINT
BARROWAY TOPAZ GRANT & EISENHOFER P.A.
KESSLER MELTZER & CHECK LLP Jay W. Eisenhofer
Gregory M. Castaldo Geoffrey C. Jarvis
Andrew L. Zivitz Charles T. Caliendo
Sharan Nirmul Brenda F. Szydlo
Naumon A. Amjed 485 Lexington Avenue, 29th Floor
Jennifer L. Keeney New York, NY 10017
Richard A. Russo, Jr. Tel: [phone]
280 King of Prussia Rd. Fax: [phone]
Radnor, PA 19087
Tel: [phone]
Fax: [phone]
COUGHLIN STOIA GELLER MOTLEY RICE LLP
ROBBINS & RUDMAN, LLP Joseph S. Rice
Robert M. Rothman William H. Narwold
58 South Service Road Gregg S. Levin
Suite 200 28 Bridgeside Blvd.
Melville, NY 11747 Mt. Pleasant, SC 29464
Tel: [phone] Tel: [phone]
Fax: [phone] Fax: [phone]
CO-LEAD AND LIAISON COUNSEL FOR LEAD PLAINTIFFS AND THE CLASS
TABLE OF CONTENTS
I. SUMMARY OF THE ACTION 3
A. The Subprime Fraud 6
1. UBS’s Drive to Become the World’s Most Profitable Investment Bank 8
2. The Creation of DRCM 11
3. The Defendants Conceal Massive Losses at DRCM 13
4. UBS Closes DRCM to Avoid Disclosures about its Losses 16
5. UBS’s Inexperienced IB Replicated DRCM’s Subprime-Backed Positions
and Their Resulting Losses Were Also Concealed From Investors 18
6. UBS Places A $100 Billion Wager on Subprime in Flagrant Disregard of
Risk Controls 20
7. Defendants Knew That UBS Had Accumulated a $100 Billion Subprime
and Alt-A Mortgage-Backed Asset Portfolio And That It Was Materially
Over-Valued 24
8. UBS’s $48 Billion Asset Write-Down 26
9. The Fallout at UBS Relating to the Subprime Fraud: Terminations and
Governmental Investigations 27
10. The UBS Shareholder Report 30
B. Defendants Conceal UBS’s Multi-Billion Dollar Exposure to Auction Rate
Securities (“ARS”) 32
C. UBS Built Its U.S. Cross Border Business On A Foundation of Unsustainable
Illegal Activities While Representing to its Investors That It Was A Highly
Ethical Bank With a Conservative Risk Culture 34
II. JURISDICTION AND VENUE 39
III. PARTIES 39
A. Plaintiffs 39
B. The Corporate Defendant 41
C. The Individual Defendants 42
D. The ’33 Act Defendants 49
E. The Confidential Witnesses Cited Throughout the Complaint 49
IV. UBS’s ORGANIZATIONAL STRUCTURE 52
V. CONTROL PERSON ALLEGATIONS/GROUP PLEADING 53
VI. BACKGROUND OF SUBPRIME SCHEME 55
A. The U.S. Mortgage Crisis 55
1. The Explosion of Fixed Income Instruments Collateralized by U.S.
Residential Mortgages 57
2. Cash CDOs 60
3. Synthetic CDOs 65
B. The Value of Fixed Income Securities Based on RMBS Were Sensitive to the
Performance of the Underlying Pools of Mortgages 67
C. Indicators That Mortgage Markets Were Deteriorating by Early 2006 68
VII. THE DEFENDANTS’ FRAUDULENT SUBPRIME SCHEME 76
A. UBS Publicly Claims to Improve Its Internal Controls Following the Long Term
Capital Management Crisis and UBS’s Merger with SBC 76
B. UBS Publicly Purports to Implement New Risk Management Policies and
Controls to Prevent the LTCM Debacle From Reoccurring 78
C. UBS Privately Casts Aside Its Internal Controls in a Renewed Effort to Become
an Investment Banking Powerhouse 79
1. U.S. Mortgage-Backed Securities Secretly Became the Backbone of
UBS’s Investment Banking Growth Plan 82
2. UBS Launches DRCM in June 2005 as an Internal Hedge Fund to Pursue
U.S. Fixed Income Investments Backed by U.S. Subprime Residential
Mortgages 83
3. The Appointment of Costas, Hutchins and Karl as DRCM’s Leadership 84
4. DRCM Takes Control of the IB’s Real Estate Business 86
5. Risk Management Controls for DRCM 89
6. UBS Secretly Doubles-Down on Fixed Income by Simultaneously
Ramping-up Its IB With Personnel Inexperienced to Handle the Risks 91
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7. The IB’s External Consultant’s Report Identified UBS’s Fixed Income
Business as the Company’s Biggest Competitive Gap 94
8. The IB’s Fixed Income Growth Strategy is Privately Endorsed by UBS’s
Global Executive Management Group Despite the Group’s Concerns
About Internal Controls 95
D. DRCM and FIRC Secretly Take on Enormous Risks as They Focus on Subprime
and Alt-A Mortgage-Backed Assets as Their Principal Investment and Trading
Strategy 97
1. DRCM’s Trading Strategies Emphasize Immediate Profits at the Expense
of Exposing UBS to Enormous Market Risks 97
2. The IB Privately Adopts an Equally Risky Strategy of Originating
Subprime-Backed Mezzanine CDOs and Retaining the Resulting Super
Senior Tranches 98
E. UBS Risk Managers and Traders Within IB and DRCM Manipulated Risk
Control Indicators to Conceal the True Risks to Which UBS was Exposed 106
1. VaR as an Externally Reported Indicator of UBS’s Risk 107
2. DRCM and IB Employees Manipulated VaR to Conceal the True Market
Risks to Which UBS Was Exposed 108
3. Tier 1 Capital Ratio as an External Indicator of Risk 111
4. A $1.31 Billion Credit Default Swap Transaction Between UBS and a
Hedge Fund Restricted to a $40 Million Investment Evidences
Defendants’ Deceit 115
F. UBS Concealed the True Value of Its Subprime Exposure by Manipulating Its
Asset Valuations Throughout the Relevant Period 116
1. UBS’s Valuation Policies During the Class Period 116
2. External Market Conditions Required UBS to Adjust Its Carrying Values
of Its Assets 118
3. Internal Events Required UBS to Markdown the Carrying Value of its
Assets Beginning in Q1 2007 121
a) The Eventual DRCM Write-downs 122
b) Defendants Publicly Acknowledged UBS’s Exposure to Losses in
the Subprime and Alt-A Mortgage Market 125
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c) Defendants Had Actual Knowledge of the Impairment of UBS’s
Subprime Alt-A Mortgage-Backed Assets as Early as April 2007
Due to UBS’s Secret Audit of DRCM and the IB 127
d) UBS’s Closing of DRCM and the Termination of UBS Executives
Concealed From the Market That the Carrying Values of UBS’s
Subprime and Alt-A Mortgage-Backed Assets Were Materially
Inflated 129
VIII. THE AUCTION RATE SECURITIES SCHEME 132
IX. THE TAX FRAUD SCHEME 135
A. UBS Built Its U.S. Cross-Border Business on A Foundation of Illegal Conduct 137
B. The Private Bank 139
C. UBS Institutionalized Illegal Cross-Border Activities throughout the Class Period,
Exposing the Company to Massive Operational Risks 142
D. UBS Violated The Requirements of the Qualified Intermediary Agreement with
the IRS to Disclose Identities of U.S. Clients Or Withhold Taxes 148
E. The Effect of the U.S. Tax Fraud on the Private Bank Has Been Devastating to
Shareholder Value 160
X. DEFENDANTS LEAK OUT THE TRUTH IN STAGES 162
A. UBS Selectively Disclosed News Relating to Its Potential Subprime And Alt-A
Exposure While Downplaying the True Impact on Its Financials 163
B. Additional Write Downs Continue to Reveal the Extent of UBS’s Fraud and
Necessitate Further Capital-Raising Plans 168
C. UBS is Compelled by Swiss Authorities to Explain the Reasons for Its Write-
downs in a Shareholder Report 170
D. Details About UBS’s Illegal Scheme to Help Clients Evade Taxes Begin to
Surface 179
XI. FALSE AND MISLEADING STATEMENTS AND/OR OMISSIONS DURING THE
CLASS PERIOD 187
1. 2Q 2003 Form 6-K 187
2. 2Q 2003 Earnings Conference Call 188
3. 3Q 2003 Form 6-K 188
4. 4Q 2003 Form 6-K 190
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5. 2003 Annual Review 192
6. 2003 Form 20-F 193
7. The 2003 Handbook 196
8. 1Q 2004 Form 6-K 199
9. 1Q 2004 Earnings Conference Call 200
10. June 22, 2004 Raoul Weil Interview 201
11. 2Q 2004 Form 6-K 201
12. 2Q 2004 Earnings Conference Call 204
13. June 2004 Mid-Year Report 207
14. 3Q 2004 Form 6-K 208
15. 3Q 2004 Earnings Conference Call 209
16. 4Q 2004 Form 6-K 210
17. 4Q 2004 Earnings Conference Call 212
18. 2004 Form 20-F 213
19. 2004 Handbook 214
20. April 21, 2005 Annual General Meeting 216
21. 1Q 2005 Form 6-K 218
22. 1Q 2005 Earnings Conference Call 220
23. June 30, 2005 Press Release 222
24. July 2005 EuroMoney Interview with John Costas 223
25. 2Q 2005 Form 6-K 224
26. 2Q 2005 Earnings Conference Call 225
27. 3Q 2005 Form 6-K and Press Release 227
28. 3Q 2005 Earnings Conference Call 230
29. The 4Q 2005 Form 6-K 232
30. 4Q 2005 Earnings Conference Call 236
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31. The 2005 Annual Report 237
32. 2005 Handbook 248
33. 1Q 2006 Form 6-K 254
34. 2Q 2006 Form 6-K 256
35. 2Q 2006 Earnings Conference Call 259
36. September 19, 2006 Reuters Article 260
37. 1H 2006 Form 6-K 261
38. 3Q 2006 Form 6-K 263
39. 4Q 2006 Form 6-K 267
40. 4Q 2006 Earnings Conference Call 272
41. The 2006 Annual Report 276
42. 2006 Handbook 286
43. 2007 Fixed Income Investor Day 290
44. 1Q 2007 Earnings Press Release and Form 6-K 292
45. 1Q 2007 Earnings Conference Call 296
46. June 4, 2007 Risk Management Presentation 307
47. 2Q 2007 Form 6-K 309
48. 2Q 2007 Earnings Conference Calls 315
49. October 1, 2007 Press Release 322
50. 1H 2007 Form 6-K 323
51. October 1, 2007 Conference Call 325
52. 3Q 2007 Form 6-K 327
53. 3Q 2007 Earnings Conference Calls 329
54. 4Q 2007 Form 6-K 337
55. 2007 Annual Report 339
56. April 8, 2008 Registration Statement 344
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57. April 12, 2008 Kurer Interview 345
58. 2008 Annual General Meeting 345
59. 1Q 2008 Form 6-K 346
60. July 17, 2008 Press Release 348
61. 2Q 2008 Form 6-K 349
62. October 2, 2008 Extraordinary General Meeting 350
63. 3Q 2008 Form 6-K 351
64. 4Q 2008 Form 6-K 352
XII. UBS’S AND THE INDIVIDUAL DEFENDANTS’ SCIENTER 353
A. Defendants Were Specifically Informed That UBS’s Valuation Methodologies
Failed to Properly Value UBS’s Subprime and Alt-A Mortgage-Backed Assets355
1. A Senior UBS Employee Warned Defendants as Early as 2004 That
UBS’s Valuation Models for its ABS, CDOs and CDSs Were Improper
Causing UBS’s Subprime and Alt-A Mortgage-Backed Assets to be
Materially Overvalued 355
2. A UBS Executive Admitted That UBS Applied Subjective Marks to its
CDOs Positions During the Class Period 357
3. The Preliminary Results of the Secret Internal Audit of DRCM Identified
Issues With UBS’s Valuation of Subprime Positions 359
B. The Write-Downs at DRCM Provide a Strong Inference of Defendants’
Knowledge and Deliberate Disregard That UBS’s RMBS and CDO Holdings
Were Materially Overvalued During the Class Period 360
1. The March 2007 Write-Downs 360
2. The April 2007 Write-Downs 363
3. UBS’s Secret Audit of DRCM 364
C. The Circumstances Surrounding the Closure of DRCM and the OIF Provide a
Strong Inference of Scienter 365
D. UBS’s Failure to Regulate the Extension of Its Low Cost Funding to the IB
Throughout the Class Period is Additional Evidence of Scienter 369
1. UBS’s Funding Policy 369
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2. Defendants Knew or Recklessly Disregarded the Negative Effects of the
Funding Policy 371
E. The Government Investigations Launched by U.S. and Swiss Government
Agencies Further Evidences Defendants’ Scienter 373
1. The SEC Investigation 374
2. The U.S. DOJ Investigation 376
3. The SFBC Investigation 376
F. The Termination and Resignation of Key Members of UBS’s Senior Management
Team and Other Participants in the Fraud is Further Evidence of Defendants’
Scienter 377
G. Confidential Witnesses Confirm UBS’s Admitted Lack of Risk Management and
Internal Controls During the Class Period 381
H. Defendants Knew of or Recklessly Disregarded Red Flags Indicating That
Subprime and Alt-A Mortgage-Backed Securities Were Risky and That UBS’s
Valuations of These Securities Were Materially Overstated 385
1. UBS Analysts Repeatedly Warned the Market of Trouble Ahead In U S.
Residential Mortgage Markets 385
2. UBS’s “Investor Optimism” Press Releases Warned That Investors Were
Concerned With the Developments in the U.S. Residential Mortgage
Market 387
3. UBS Attempted To Mitigate Losses Associated With Defaulted Loans
Beginning in 2006 389
4. Mortgage Market Indices Indicated Severe Downturn in the Subprime
Sector Beginning in Q4 2005 391
I. Confidential Witnesses Confirm UBS’s Knowledge of Problems in the Subprime
Mortgage Market 394
1. UBS Analysts Repeatedly Warned the Market of Liquidity and Valuation
Concerns in the RMBS and CDO Market 398
2. UBS Received Monthly Trustee Reports from the CDO Asset Managers405
3. Publicly Reported Write-downs and Asset Sales During 1Q 2007 and 2Q
2007 Were Red Flags 406
4. The Decline of the ABX Index Served as a Red Flag to UBS 409
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J. UBS’s Cross Border Business And Its Counseling of U.S. Clients To Evade
Taxes Is A Knowing And Admitted Fraud Involving Senior UBS Executives 412
K. UBS Knowingly Accumulated and Failed to Properly Value $5.9 Billion in ARS424
XIII. ADDITIONAL SCIENTER ALLEGATIONS AGAINST THE INDIVIDUAL
DEFENDANTS AND UBS 429
A. The Executive Officer Defendants 429
B. Defendants Wuffli, Rohner, Jenkins, Stuerzinger, Standish and Suter Were
Responsible for Implementing UBS’s Risk Management Protocols As Members
of the GEB 430
C. Defendant Ospel’s and Defendant Suter’s Knowledge and/or Extremely Reckless
Disregard of UBS’s Risk Control Deficiencies Based on Their Positions in the
Chairman’s Office (“ChO”) 434
D. The DRCM Defendants’ and the IB Defendants’ Knowledge and/or Extremely
Reckless Disregard of the Fraud 435
XIV. UBS’S FINANCIAL STATEMENTS FAILED TO COMPLY WITH IFRS, GAAP
AND SEC REGULATIONS 438
A. Applicable Accounting Principles And SEC Regulations 439
B. UBS’s Failure to Follow Applicable Accounting Principles Misrepresented Its
Financial Appearance 443
C. UBS’s Valuation of its RMBS and RMBS CDO Related Positions Violated
Applicable Accounting Principles 444
D. UBS’s Disclosures Regarding Its RMBS and RMBS CDO Related Positions, And
Concentrations of Risk, Violated Applicable Accounting Principles And SEC
Regulations 450
E. UBS’s Failure to Maintain Adequate Controls Over Its Financial Reporting And
Disclosures Violated Applicable Accounting Principles And SEC Regulations 460
F. UBS Violated IFRS By Failing to Disclose a Contingent Liability In Connection
with Its Wealth Management Services 463
XV. ADDITIONAL JURISDICTION ALLEGATIONS 464
A. The Locus of DRCM’s Fraudulent Conduct was the United States 468
B. The Locus of the IB’s Fraudulent Conduct was the United States 468
C. The Locus of the Auction-Rate Securities Fraud is the United States 478
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