Thursday, December 13, 2007

Subprime Litigation Wave Hits UBS – and Other Web Notes

To see this page on The D & O Diary's new website, refer here. To go to the home page of The D & O Diary's new website, refer here.

In a prior post (here), I compared the similarity of the piecemeal way that UBS, Merrill Lynch and Citibank have disclosed their subprime-related asset valuation write-downs. Now UBS has one more thing in common with the other two banks – it has been named as a defendant in a securities class action lawsuit.

According to the plaintiff’s counsel’s December 13, 2007 press release (here), the plaintiffs initiated a securities lawsuits in the Southern District of New York against UBS AG and certain of its directors and officers. A copy of the complaint can be found here. According to the press release, the complaint alleges that
On October 30, 2007, UBS issued a press release announcing its financial results for the third quarter of 2007. In the days following this announcement, the price of UBS stock declined to as low as $49.27 per share. Then, on December 10, 2007, UBS announced writedowns of around $10 billion as a result of its subprime mortgage related positions. Following this announcement, the price of UBS stock declined to $48.78 per share, a 26% decline from the Class Period high. The action purports to be brought on behalf of all shareholders who purchased UBS stock between March 13, 2007 and December 11, 2007.
The complaint quotes at length from an October 12, 2007 Wall Street Journal article entitled "U.S. Investors Face An Age of Murky Pricing" (here) which discusses at length how in March 2007, a hedge-fund unit of UBS (Dillon Read) was slashing its valuations on subprime-related assets at a time when UBS was carrying similar assets at much higher valuations. The article describes tense communications between UBS bankers and the Dillon Read trader, in which they questioned where he was coming up with his valuations, and he questioned the bankers’ valuations at higher levels that he felt were unavailable in the marketplace. UBS closed the hedge fund this summer, but it also did later write down its assets to lower valuations, and more recently to much lower valuations. (I commend this article if you have not yet read it; I re-read it for purposes of writing this blog post and even though it is only two months old it already provides some interesting and useful perspective.)

In addition to the securities class action, according to a separate December 13, 2007 press release (here), separate plaintiffs’ counsel have filed a separate lawsuit in the Southern District of New York, raising similar allegations, on behalf of UBS employees who suffered losses as purchasers of their employers stock in their 401(k) plans.

As I discussed at greater length in my prior post (here), the pattern of piecemeal disclosure of subprime-related losses is one factor contributing to the subprime litigation wave. Unfortunately, the difficulties that many companies are having in valuing assets in a deteriorating environment contributes to this disclosure pattern, and potentially to further subprime-related litigation.

I have added the new UBS lawsuits to my running tally of subprime related litigation (here). With the addition of the UBS action, the current tally of subprime related securities class action lawsuits now stands at 26, not counting the four subprime-related securities lawsuits that have been filed against residential home construction companies and the two subprime-related securities lawsuits that have been filed against the rating agencies. These categories taken together add up to 32 subprime-related securities lawsuits. In addition, the UBS 401(k) lawsuit brings the total of subprime-related ERISA/401(k) lawsuits to five.

Options Backdating-Related Securities Settlement: On December 13, 2007, American Tower announced (here) that it has reached a settlement in principle of the consolidated options backdating-related securities class action lawsuits that had been filed against the company and certain of its directors and officers. Refer here for background regarding the lawsuit. In connection with the settlement, the company will make a $14 million cash payment. The company stated that "it has been and will continue to be in discussions with its insurers concerning the amount of their contribution to the settlement."

I have added the American Tower settlement to my cumulative table of options backdating-related lawsuit settlements, dismissals, and denials. The table can be accessed here.

Another Target for Subprime Ire: The list of purported scapegoats for the subprime crisis is already lengthy, but a December 13, 2007 Washington Post article entitled "Analysts Late to the Alarm" (here) adds yet another new category of targets to blame. The article notes that securities analysts "did not sound the alarm on the subprime mess," but asks whether "analysis [should] have seen the meltdown coming?"

The article observes that while there have been much "finger-pointing" at the analysts, there has as yet been "no conclusion." Among other things, the complexity of the financial instruments involved and the multifaceted nature of the credit issues eluded all but a few analysts. Other contributing factors for the analysis included "the pressure to always be right, the difficulty of going against the tide, and the need to hang onto clients." The article also examines, without expressing views, whether conflicts of interests could have played a role.

Why the JDS Uniphase Securities Suit Went to Trial: Law.com has a December 13, 2007 article entitled "In-House Lawyers Go for All or Nothing in Securities Case" (here), which gives an inside look at why the JDS Uniphase case went to trial (for background about the trial refer here). The article examines the process that led up to the decision to take the case to trial and the barriers that prevented settlement. The article also gives a look at the pressure the company’s in-house counsel faced as a result of the decision to take the case to trial.

The lawyers involved in this case clearly deserve credit for courage and perseverance. But after reading the account of what they went through, it is hard to imagine may others being willing to make the same decision and to face that kind of pressure. The JDS Uniphase verdict theoretically might embolden others to push a case to trial, but the reality is that very few would be willing to undertake the risk and the pressure.

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