Opinion ID: 2672668
Heading Depth: 2
Heading Rank: 1

Heading: The CDO/RMBS Fraud

Text: Plaintiffs allege that UBS accumulated and overvalued $100 billion in residential mortgage backed securities (“RMBS”) and collateralized debt obligations (“CDOs” and, together with RMBS, “mortgage‐related assets”)7 between February 13, 2006 and April 21, 2008, without disclosing this to shareholders and in contravention of its representations regarding its risk management policies. The acquisition of the $100 billion portfolio began with the 2006 launch of Dillon Read Capital Management (“DRCM”), an internal hedge fund8 run by John Costas, the CEO of UBS’s Investment Bank (“IB”). According to plaintiffs, DRCM began 7 We have explained that RMBS are “a type of asset‐backed security—that is, a security whose value is derived from a specified pool of underlying assets. Typically, an entity (such as a bank) will buy up a large number of mortgages from other banks, assemble those mortgages into pools, securitize the pools (i.e., split them into shares that can be sold off), and then sell them, usually as bonds, to banks or other investors.” Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 710 n.3 (2d Cir. 2011) (internal quotation marks omitted). The RMBS at issue here are collateralized by pools of subprime, or high risk, mortgage loans. The CDOs in question are bonds secured by a pool of RMBS which, in turn, are collateralized by subprime loans. 8 An internal hedge fund is a discrete business unit within a financial institution that is devoted entirely to “proprietary trading”—that is, trading with the firm’s own money instead of depositors’ money, which enables the bank to make a higher profit. Examining the Impact of the Volcker Rule on Markets, Businesses, Investors, and Job Creation: J. Hearing Before the Subcomm. on Fin. Insts. and Consumer Credit and the Subcomm. on Captital Mkts. and Govʹt Sponsored Enters. of the H. Comm. on Fin. Servs., 112 Cong. 214‐15 (2012) (statement of Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System). 8 No. 12‐4355‐cv acquiring billions of dollars’ worth of RMBS/CDOs, which added “pressure to grow IB Fixed Income.” Accordingly, the IB began acquiring the same types of assets on a larger scale. Following significant write‐downs on DRCM’s subprime portfolio, UBS closed DRCM and reintegrated its $20 billion portfolio into the IB. Plaintiffs allege that UBS concealed the scope of the IB’s subprime portfolio (disclosing $23 billion rather than $100 billion) and, as the subprime market began to collapse in February 2007, concealed the losses in that portfolio by failing to revalue the mortgage‐related assets. Plaintiffs allege that UBS belatedly announced its first mortgage‐related write‐down of $4 billion on October 1, 2007, and ultimately wrote down the portfolio by $48 billion.