UBS Ag (London Branch) and Another v Kommunale Wasserwerke Leipzig Gmbh UBS Ltd and Another (Third Parties)
| Jurisdiction | England & Wales |
| Judge | The Honourable Mr Justice Males,Mr Justice Males,MR JUSTICE MALES |
| Judgment Date | 04 November 2014 |
| Neutral Citation | [2014] EWHC 3615 (Comm) |
| Docket Number | Case No: 2010 Folio 50 2010 Folio 500 2010 Folio 505 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 04 November 2014 |
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[2014] EWHC 3615 (Comm)
The Honourable Mr Justice Males
Case No: 2010 Folio 50
2010 Folio 1224
2010 Folio 500
2010 Folio 505
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
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.
| 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 |
INTRODUCTION
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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