UBS Ag (London Branch) and Another v Kommunale Wasserwerke Leipzig Gmbh UBS Ltd and Another (Third Parties)

JurisdictionEngland & Wales
CourtQueen's Bench Division (Commercial Court)
JudgeThe Honourable Mr Justice Males,Mr Justice Males,MR JUSTICE MALES
Judgment Date04 Nov 2014
Neutral Citation[2014] EWHC 3615 (Comm)
Docket NumberCase No: 2010 Folio 50 2010 Folio 500 2010 Folio 505

[2014] EWHC 3615 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

The Honourable Mr Justice Males

Case No: 2010 Folio 50

2010 Folio 1224

2010 Folio 500

2010 Folio 505

Between:
(1) UBS Ag (London Branch)
(2) UBS Global Asset Management (UK) Ltd
Claimants
and
Kommunale Wasserwerke Leipzig Gmbh
Defendant

and

(1) UBS Limited
(2) Depfa Bank Plc
Third Parties
And Between:
UBS Limited
Claimant
and
Depfa Bank Plc
Defendant

and

Kommunale Wasserwerke Leipzig Gmbh
Third Party
And Between:
UBS Ag (London Branch)
Claimant
and
Landesbank Baden-Württemberg
Defendant

and

UBS Limited
Third Party

Lord Falconer, Mr Richard SladeQC, Mr Jonathan DawidandMr Edward Harrison (instructed by Mayer Brown International LLP) for the UBS parties

Mr Tim Lord QC, Mr Simon SalzedoQC, Mr Stephen MidwinterandMr Craig Morrison (instructed by Addleshaw Goddard LLP) for KWL

Mr David Railton QC, Mr Edward LeveyandMr Richard Power (instructed by Dentons UKMEA LLP) for DEPFA

Mr Nicholas Peacock QC, Miss Catherine AddyandMiss Fiona Dewar (instructed by Baker & McKenzie LLP) for LBBW

Hearing dates: 29 th April – 31 st July 2014

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

The Honourable Mr Justice Males

TABLE OF CONTENTS

Para

INTRODUCTION

1–4

The transactions in outline

5–10

The proceedings

11–13

The principal claims and counterclaims

14

The Balaba STCDO

15–20

GECC, MBIA and Merrill Lynch single name CDSs

21

The LBBW Back Swap

22–24

The Depfa Back Swap

25–27

The Depfa Front Swap

28–29

The portfolio management claim

30–31

THE CAST LIST

32

UBS Investment Bank

33–34

UBS's top management

35

The Credit Structuring Team

36–38

Municipal Securities

39–40

Debt Capital Markets

41–42

Trading/hedging

43–45

Control functions

46–47

UBS GAM

48–49

KWL

50–53

Value Partners

53–56

The external lawyers

57–58

LBBW

59–61

Depfa

62–64

THE EVIDENCE

Standard of proof

65

Documents

66–69

General approach to witnesses

70–72

The UBS witnesses

Mr Steven Bracy

73–81

Mr Oscar Sanz-Paris

82–82

Mr Bryon Lancaster

84

Mr Paul Czekalowski

85–86

Ms Jeanne Short

87

Mr Sunil Dattani

88

KWL witnesses

Dr Andreas Schirmer

89–105

The other KWL witnesses

106–107

LBBW and Depfa witnesses

108–109

THE STCDO TRANSACTIONS EXPLAINED

110

The cross-border leases

111–113

The single name payment undertakings

114–115

The elements of the transactions in issue

116

The Credit Default Swaps

117

Single Tranche Collateralised Debt Obligations

118–123

An example

124

The KWL STCDOs

125–128

UBS's profit

129–134

Increased or reduced risk?

135–140

Premiums

141

Ratings

142–149

Spreads

150–153

Overall

154–159

DETAILED NARRATIVE

160

The background to the parties' initial discussions

161–170

The 6 April 2006 conversation between Mr Bracy and Value Partners

171–181

The arrangement between Mr Bracy and Value Partners

182–201

Value Partners' advice to KWL

202–204

Initial discussions involving the London team

205–213

Value Partners requests payment for recommending UBS GAM

214–218

Mr Bracy's view of the Value Partners relationship

219–224

Preparation for the 9 May 2006 "kick off" meeting

225–227

The 9 May 2006 meeting

228–246

Mr Kraus's German language presentation

247–250

Beating up Mr Cox

251–258

The shadow Standard & Poor's rating

259–260

The meeting with Wilmington Trust in New York

261–266

Formal engagement of UBS and UBS GAM

267–268

The Engagement Letter

269–271

The Risk Disclosure Letter

271–275

The Letter of Authority

276

The internal credit approval process begins

277–284

The 20 May 2006 due diligence meeting

285–297

CRC declines the transaction

298–299

Escalation of the approval decision

300–315

Approval of the transaction

316

The approval conditions

317–326

Closing of the Balaba transaction

327–330

The Freshfields capacity opinion

331–368

Execution of the Balaba transaction

369–370

Congratulations to Mr Bracy and further development of the Value Partners relationship

371–390

KWL's further engagement of Value Partners

391–392

Value Partners' visit to Mr Ryan

393–398

Further Value Partners deals

399–406

The search for an intermediary bank

407

Discussions with LBBW

408–437

KWL's Supervisory Board meeting of 7 September 2006

438–444

The expenses scandal

445–455

The "letter for K"

456–466

The safari

467–470

The "transaction overview" document

471–477

LBBW drops out

478–479

Discussions with Depfa

480–516

The Value Partners Introducing Agreement

517–519

The collapse in the financial markets in 2008

520

The termination of the Balaba single name CDS

521

Potential restructuring

522

Defaults to the Reference Portfolio and the termination of the STCDOs

523–528

ABUSE OF THE POWER OF REPRESENTATION

529–530

KWL's constitution

531–533

German law

534–547

Was Supervisory Board approval required?

548–557

Was shareholder approval required?

558–561

Was there "gross negligence" by UBS in failing to appreciate the need for Supervisory Board (or other) approval?

562–576

BRIBERY

577–586

Bribery

587–588

The bribery issues

589–590

Was Value Partners the agent of UBS?

591–608

Was payment of the bribe within the scope of the agency?

609–620

CONFLICT OF INTEREST

621

Conflict of interest – the law

622–624

The conflict of interest issues

625–627

Attribution – the law

628–635

Attribution – the principles applied

636–641

FRAUDULENT MISREPRESENTATION

642

The representations

643–645

Fraudulent misrepresentation – the law

646–648

"Virtually risk free"

649–655

"Reduction of risk through diversification"

656–667

"Risk of default indicated by credit ratings"

668–674

"Clear, fair and not misleading"

675–676

UBS'S CLAIMS FOR BREACH OF WARRANTY AND MISREPRESENTATION

677–696

BRIBERY AND CONFLICT OF INTEREST — REMEDY

Rescission of the Balaba STCDO

697–708

KWL's claim for damages or an indemnity

709–716

Consequences of the rescission of the Balaba STCDO

717–724

The bribe paid to Mr Heininger

725

The sums siphoned off by Value Partners

726

Sums paid or payable to KWL under the single name CDSs

727–729

Sums received by KWL and used to purchase additional subordination

730

Conclusion

731

RESCISSION OF THE DEPFA BACK SWAPS

732

The representations relied upon

733–737

Were the representations made?

738–739

No knowledge of dishonesty

740–743

No knowledge of taint

744750

Were the representations false?

751–753

Were the representations fraudulent?

754–772

Contractual estoppel

773–784

Reliance

785–786

Consequences of rescission

787–794

RESCISSION OF THE LBBW BACK SWAP

795–799

THE DEPFA FRONT SWAPS

800–801

Single transaction

802

Agency

803–806

Evident abuse

807–811

Conclusion

812

CONSTRUCTION OF THE LBBW AND DEPFA BACK SWAPS

813–814

The purpose of clause 6

815–816

The background

817–818

The payment regime in the absence of Early Termination

819–827

The payment regime in the event of Early Termination

828–834

Conclusion

835

RECTIFICATION OF THE BACK SWAPS

836

Rectification and estoppel – the law

837–839

The rectification sought by UBS

840–844

Rectification of the LBBW Back Swap

Credit risk

845–848

Validity risk

849–852

Rectification of the Depfa Back Swaps

853–857

Entire agreement

858

MISCELLANEOUS FURTHER CLAIMS

859

Depfa's claim for recovery of the payment made to UBS

860–861

Return of collateral

862

THE PORTFOLIO MANAGEMENT CLAIM

863–866

The standard required by the Portfolio Management Agreements

867–875

Breach

876

A concentrated bet on financials

877–881

Minimising risk or maintaining ratings?

882–885

The Moody's Metric

886

The relevance of spreads

887–888

Assessment of different market scenarios

889

Quarterly reports

890–899

No early exit strategy

900–905

Conclusion on breach

906–907

Causation and assessment of loss

908–910

Conclusion

911

OVERALL CONCLUSIONS

912

The Balaba STCDO

913

UBS's damages claims

914

Consequences of rescission as between UBS and KWL

915

The Back Swaps

916–917

Contingent conclusions

918

Concluding observations

919–922

Mr Justice Males

INTRODUCTION

1

In 2006 and 2007 the Leipzig municipal water company ("KWL") sold credit protection to the investment bank UBS and to two other banks ("LBBW" and "Depfa") on four portfolios of investment grade bonds and other securities. It did so by means of a series of complex derivative products known as Single Tranche Collateralised Debt Obligations ("STCDOs"). The effect of these STCDOs was in each case that if any ten or so of the entities in the portfolios defaulted during an eight or ten year period,...

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