Hedge Fund Suit Forces UBS To Pony Up $35 Million

Sep 10 2009 | 10:50am ET

A judge has ordered UBS to set aside $35.5 million to cover a potential verdict against it in a lawsuit brought by hedge fund Pursuit Partners.

According to Pursuit, UBS sold it a collateralized debt obligation despite its internal belief that the securities were “crap.” Indeed, Judge John Blawie cited a e-mail from a banker at UBS boasting that he had “sold more crap to Pursuit” in his ruling.

The Stamford, Conn.-based hedge fund “presented sufficient evidence to satisfy the probable cause standard with respect to their claim that UBS was in possession of superior knowledge that was not readily available” to Pursuit.

Pursuit bought the CDOs between July and October of 2007. UBS sold them despite their belief that ratings agencies were about to downgrade the investment-grade securities, and never warned the hedge fund about it, Pursuit said. Indeed, in October, Moody’s Investor Services—which Pursuit is also suing, along with Standard & Poor’s parent McGraw-Hill Cos.—slashed its rating on the CDOs, which eventually defaulted. Pursuit lost its entire investment.

UBS called the judge’s ruling was a “preliminary procedure to require defendants to post security while a case is pending, nothing more.”

“UBS is confident that it will prevail on the merits of the case,” UBS said in a statement.

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