In a public report that makes for some interesting reading,
UBS on October 14, 2010 released a statement disclosing that though its own
investigation had concluded that "what happened should not have been
allowed to happen," the company will take no legal action against its
former directors and offices for losses the company suffered during the U.S
subprime meltdown that forced a government bailout of the company. The
company's write-down of mortgage related assets exceeded $50 billion.
The company's October 14 statement can be found here
and the report itself, which was undertaken pursuant to the May 2010
recommendation of the Swiss Federal Assembly, can be found here.
The report includes a number of critical findings,
including an assessment that the company's "growth strategy" was
"not planned in a sufficiently systematic manner," which contributed
to the bank's losses. The management incentives at the time encouraged company
officials to seek revenue "without taking appropriate consideration of the
The report also concludes that there company lacked a
"uniform approach" to risk and that risk control was "based too
heavily on statistical models." As a result, and "despite
warning," the company "falsely believed" that is U.S. real
estate investments were both valuable and sufficiently hedged, though there was
"no comprehensive or continuous assessment" of the overall risk
profile of the cross-border wealth management business.
The report also concluded that there were "failures
with regard to the training and instruction" of some employees, and that
the company "did not implement an effective system of supervisory and
compliance controls necessary to convey a clear and consistent expectation that
full compliance with applicable internal controls and U.S. legal
Despite these shortcomings, the company's Board
concluded, as part of the reporting process, that it is not in the company's
interests to pursue legal claims against the former directors and officers.
In its October 14 statement, the company explains that
among the reasons the Board decided not to pursue claims is that "the
chances of any such proceedings being successful" is "more than
uncertain." The Board also took into account that these kinds of actions
"last many years, generate high costs, lead to negative informational
publicity and thus hamper UBS's efforts to restore its good name.'
The statement also notes that pursuing claims against
"could weaken UBS's legal position in pending cases, regardless of whether
the former management is ever found to be liable." The report itself goes
on to note that UBS is the subject of class action proceedings in the U.S. and
that "by litigating against its former directors and officers
inSwitzerland, UBS would negatively impact its position in these class action
proceedings in the US, in particular because, under US rules, the US plaintiffs
could claim that thisis an admission that they had in fact acted
The report emphasizes that there had been no findings of
criminal misconduct. The report states finally that "the Board of
Directors is opposed to any attempt by third parties to file actions against
former directors and officers or to pursue actions at the company's expense. In
the event that individual shareholders were to propose a vote at the general
meeting for a resolution in favor of filing a claim at the company's expense,
the Board would consider it its duty to recommend that such a proposal be
Finally, the report is accompanied by an external report
prepared by University of Zurich Law Professor Peter
Forstmoser, who concluded that though there is "a sufficient basis to
initiate legal proceedings against former individual directors or
officers," the Board's decision not to pursue legal claims is not only
"appropriate," but it is also "necessary," taking into
account the overall interests of the company and its shareholders.
The Dow Jones Newswire October
14, 2010 article about the UBS report notes that two UBS executives have
returned pay from the 2007 to 2009 time frame totaling $73.7 million. The
article also quotes a representative of one shareholder group as
"disappointed" that the UBS Board decided not to pursue a civil
lawsuit against the former directors.
I can imagine a school of thought amongst a certain type
of investor who might be outraged that the company is doing nothing to pursue
claims against the individual former directors and officers who were
responsible for the operational shortcomings identified in the report as having
caused the bank's enormous losses. I can also imagine this same type of
investor complaining that this is the type of cozy, protect-your-old-buddies
mentality that allow problems to arise the first place.
But at the same time, there is something quite
instructive and perhaps even refreshing in the report's consideration whether
the postulated claim would actually help or hurt the company. There is
something to the idea that this type of litigation, which can drag on for years
and can be enormously expensive, does more harm than good. Indeed, if all
prospective corporate and securities litigation were forced to endure this same
type of scrutiny, and had to withstand the question whether the lawsuit would
help or hurt the company and its investors on whose behalf it supposedly is
filed, there would almost certainly be significantly less corporate and
The report's justification for taking no action against
the former company officials is of course pertinent to the company and to
investors who remain invested in the company and interested in the company's
future. Investors who lost money as a result of the events analyzed in the
report and who are no longer invested in the company may continue to feel
aggrieved, but they can hardly complain that the company has refused to pursue
any claims since those investors would not have benefited either.
Where investors may be most concerned is the Board's
statement that the Board will oppose any shareholder proposals seeking claims against
the former officials. That is really the point where this report and the
Board's conclusions do seem defensive. On the other hand, if the Board really
believes it is not in the company's interest for those kinds of claims to be
pursued, then the Board's statement on this issue is simply consistent with the
overall conclusion about where the company's interests lie.
The Hits Just Keep on Coming: One
of the most distinct trends to emerge in connection with recent securities
lawsuit filings was the sudden surge during 3Q10 in securities class action lawsuits filed against for-profit education companies. On
Friday, October 15, 2010, plaintiffs; lawyers announced the filing of yet another securities suit
involving a for-profit education company, in this case Strayer Education.
According to the press release, the Complaint,
which was filed in the Middle District of Florida against the company and
certain of its directors and officers, alleges that the defendants:
failed to disclose that: (i) the Company had engaged in
improper and deceptive recruiting and financial aid lending practices and, due
to the government's scrutiny into the for-profit education sector, the Company
would be unable to continue these practices in the future; (ii) the Company
failed to maintain proper internal controls; (iii) many of the Company's
programs were in jeopardy of losing their eligibility for federal financial
aid; and (iv) as a result of the foregoing, defendants' statements regarding
the Company's financial performance and expected earnings were false and
misleading and lacked a reasonable basis when made.
The allegations in the Strayer lawsuit are similar to the
allegations in the actions previously filed against other for-profit educational
institutions in recent months. As detailed further here, these cases all relate back to a
congressionally-initiated investigation involving federally backed student
By my count, a total of seven different for-profit
education companies have been sued in securities class action lawsuits since
mid-August. These seven securities suits represent about five percent of the
roughly 136 securities class action lawsuits that have been filed so far in
Yet Another Mortgage Mess: The
headlines on the business pages have been dominated recently with tales of the
mortgage documentation mess that is choking the mortgage foreclosure process.
But according to Felix Salmon's October 13, 2010 post on his Shedding No Tiers blog,
there is yet another mortgage-related mess, relating to disclosures surrounding
the mortgage-backed securities that the investment banks sold to investors at
the peak of the housing bubble.
According to Salmon, it "turns out that there's a pretty
strong case" that the investment banks "lied to investors in many if
not most of these deals."
Salmon comments relate to a process the investment banks
followed as they assembled the pools of mortgages for securitization. As the
banks acquired mortgages, they relied on outside service providers to test the
mortgages in effect reunderwriting the mortgages according to the standards the
origination entities were supposed to have used in creating the mortgages.
In reviewing documents submitted to the Financial Crisis Inquiry Commission,
what Salmon determined is that in reunderwriting the mortgages, the outside
service providers sometimes rejected the mortgages at an astonishingly high
rate - in the specific example Salmon cites, the reviewer rejected 45% of the
It is what happened next that really troubled Salmon.
According to Salmon, rather than telling the originator that the pool wasn't
good enough, the investment banks would instead renegotiate the amount of money
they were paying for the pool. And, Salmon adds dramatically, "this is
where things get positively evil."
Salmon contends that because the investment banks knew they
would be selling the mortgages rather than keeping them, they "had an
incentive to buy loans they knew were bad," because the banks could go
back to the originator and get a discount. The advantage afforded the
investment banks is that "the less money they paid for the pool, the more
profit they could make when they turned it into mortgage bonds and sold it off
The "scandal," according to Salmon, is that
"the investors were never informed of the results" of the outside
service providers' tests. The banks didn't pass the discounts along to the
investors, who were "kept in the dark" about the tests, about the
poor results, and about the discounts. The banks, according to Salmon, were
"essentially trading on inside information about the loan pool: buying it
low (negotiating a discount from the originator) and then selling it high to
people who didn't have that crucial information."
Salmon followed up his initial provocative post with some
an interesting follow-up post as well.
More Failed Banks: This
past Friday night, the
FDIC took control of three more banks, bringing the 2010 year-to-date
number of failed banks to 132. The latest three were not in any of the real
estate disaster areas like Georgia, Florida, Illinois or California, but rather
involved banks in America's heartland. Two of the three were in Missouri and
the third was in Kansas.
Since January 1, 2008, there have been a total of 297
failed banks. During that period, there have been six bank failures in Kansas
and ten in Missouri. The states that lead with the highest number of failed
banks during that period are Georgia (44), Florida (41), Illinois (37) and
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.