UBS faces fine over CDO sale

SWISS bank UBS has been told to set aside $35m (&pound;21.1m) to cover a potential fine in a row over the sale of dubious quality securities, described by the bank&rsquo;s employees as &ldquo;crap&rdquo;.<br /><br />The judge ruled that the bank had a case to answer against hedge fund Pursuit Partners, which claims that UBS sold it securities in 2007 that it knew were about to be downgraded from investment grade.<br /><br />Superior Court Judge John Blawie ruled that there was sufficient probable cause to suggest that UBS had used its relationship with ratings agencies Moody&rsquo;s and Standard &amp; Poor&rsquo;s to obtain inside knowledge before it sold the collateralised debt obligation (CDO) notes to Pursuit.<br /><br />Judge Blawie referred to an e-mail from a UBS banker saying that he had &ldquo;sold more crap to Pursuit&rdquo;, among other correspondence which showed employees discussing a possible downgrade of the securities.<br /><br />The sale came just as the subprime mortgage market was collapsing and Pursuit eventually lost its entire investment when the securities defaulted.<br /><br />Michael Burg, acting for Pursuit, said: &ldquo;Cities, pension funds and investors have lost hundreds of millions of dollars because of what banks and rating agencies did to create highly rated CDOs when they knew subprime mortgages were a problem and downgrades were coming.&rdquo;<br /><br />In a statement, the bank said: &ldquo;The decision is not a decision on the merits or a prediction of the outcome of the case. UBS is confident that it will prevail on the merits of the case.&rdquo;<br /><br />UBS has been no stranger to controversy in the US after a three-year row with the Internal Revenue Service ended last month with the bank agreeing to hand over details of US citizens suspected of evading tax.