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United States District Court Southern District of New York in Re Ubs Ag Securities Litigation Master File No. 1:07-Cv-11225-Rjs

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United States District Court Southern District of New York in Re Ubs Ag Securities Litigation Master File No. 1:07-Cv-11225-Rjs Case 1:07-cv-11225-RJS Document 102 Filed 05/08/09 Page 1 of 563 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK IN RE UBS AG SECURITIES LITIGATION MASTER FILE NO. 1:07-CV-11225-RJS AMENDED CONSOLIDATED SECURITIES CLASS ACTION COMPLAINT BARROWAY TOPAZ GRANT & EISENHOFER P.A. KESSLER MELTZER & CHECK LLP Jay W. Eisenhofer Gregory M. Castaldo Geoffrey C. Jarvis Andrew L. Zivitz Charles T. Caliendo Sharan Nirmul Brenda F. Szydlo Naumon A. Amjed 485 Lexington Avenue, 29th Floor Jennifer L. Keeney New York, NY 10017 Richard A. Russo, Jr. Tel: 646-722-8500 280 King of Prussia Rd. Fax: 646-722-8501 Radnor, PA 19087 Tel: (610) 667-7706 Fax: (610) 667-7056 COUGHLIN STOIA GELLER MOTLEY RICE LLP ROBBINS & RUDMAN, LLP Joseph S. Rice Robert M. Rothman William H. Narwold 58 South Service Road Gregg S. Levin Suite 200 28 Bridgeside Blvd. Melville, NY 11747 Mt. Pleasant, SC 29464 Tel: (631) 367-7100 Tel: (843) 216-9000 Fax: (631) 367-1173 Fax: (843) 216-9450 CO-LEAD AND LIAISON COUNSEL FOR LEAD PLAINTIFFS AND THE CLASS Case 1:07-cv-11225-RJS Document 102 Filed 05/08/09 Page 2 of 563 TABLE OF CONTENTS I. SUMMARY OF THE ACTION......................................................................................... 3 A. The Subprime Fraud................................................................................................ 6 1. UBS’s Drive to Become the World’s Most Profitable Investment Bank ... 8 2. The Creation of DRCM ............................................................................ 11 3. The Defendants Conceal Massive Losses at DRCM................................ 13 4. UBS Closes DRCM to Avoid Disclosures about its Losses..................... 16 5. UBS’s Inexperienced IB Replicated DRCM’s Subprime-Backed Positions and Their Resulting Losses Were Also Concealed From Investors ......... 18 6. UBS Places A $100 Billion Wager on Subprime in Flagrant Disregard of Risk Controls ............................................................................................ 20 7. Defendants Knew That UBS Had Accumulated a $100 Billion Subprime and Alt-A Mortgage-Backed Asset Portfolio And That It Was Materially Over-Valued.............................................................................................. 24 8. UBS’s $48 Billion Asset Write-Down...................................................... 26 9. The Fallout at UBS Relating to the Subprime Fraud: Terminations and Governmental Investigations .................................................................... 27 10. The UBS Shareholder Report ................................................................... 30 B. Defendants Conceal UBS’s Multi-Billion Dollar Exposure to Auction Rate Securities (“ARS”)................................................................................................ 32 C. UBS Built Its U.S. Cross Border Business On A Foundation of Unsustainable Illegal Activities While Representing to its Investors That It Was A Highly Ethical Bank With a Conservative Risk Culture................................................... 34 II. JURISDICTION AND VENUE....................................................................................... 39 III. PARTIES .......................................................................................................................... 39 A. Plaintiffs ................................................................................................................ 39 B. The Corporate Defendant...................................................................................... 41 C. The Individual Defendants.................................................................................... 42 D. The ’33 Act Defendants ........................................................................................ 49 Case 1:07-cv-11225-RJS Document 102 Filed 05/08/09 Page 3 of 563 E. The Confidential Witnesses Cited Throughout the Complaint............................. 49 IV. UBS’s ORGANIZATIONAL STRUCTURE................................................................... 52 V. CONTROL PERSON ALLEGATIONS/GROUP PLEADING....................................... 53 VI. BACKGROUND OF SUBPRIME SCHEME.................................................................. 55 A. The U.S. Mortgage Crisis...................................................................................... 55 1. The Explosion of Fixed Income Instruments Collateralized by U.S. Residential Mortgages .............................................................................. 57 2. Cash CDOs............................................................................................... 60 3. Synthetic CDOs........................................................................................ 65 B. The Value of Fixed Income Securities Based on RMBS Were Sensitive to the Performance of the Underlying Pools of Mortgages............................................. 67 C. Indicators That Mortgage Markets Were Deteriorating by Early 2006 ................ 68 VII. THE DEFENDANTS’ FRAUDULENT SUBPRIME SCHEME .................................... 76 A. UBS Publicly Claims to Improve Its Internal Controls Following the Long Term Capital Management Crisis and UBS’s Merger with SBC ................................... 76 B. UBS Publicly Purports to Implement New Risk Management Policies and Controls to Prevent the LTCM Debacle From Reoccurring ................................. 78 C. UBS Privately Casts Aside Its Internal Controls in a Renewed Effort to Become an Investment Banking Powerhouse ..................................................................... 79 1. U.S. Mortgage-Backed Securities Secretly Became the Backbone of UBS’s Investment Banking Growth Plan ................................................. 82 2. UBS Launches DRCM in June 2005 as an Internal Hedge Fund to Pursue U.S. Fixed Income Investments Backed by U.S. Subprime Residential Mortgages ................................................................................................. 83 3. The Appointment of Costas, Hutchins and Karl as DRCM’s Leadership 84 4. DRCM Takes Control of the IB’s Real Estate Business .......................... 86 5. Risk Management Controls for DRCM.................................................... 89 6. UBS Secretly Doubles-Down on Fixed Income by Simultaneously Ramping-up Its IB With Personnel Inexperienced to Handle the Risks... 91 ii Case 1:07-cv-11225-RJS Document 102 Filed 05/08/09 Page 4 of 563 7. The IB’s External Consultant’s Report Identified UBS’s Fixed Income Business as the Company’s Biggest Competitive Gap............................. 94 8. The IB’s Fixed Income Growth Strategy is Privately Endorsed by UBS’s Global Executive Management Group Despite the Group’s Concerns About Internal Controls ............................................................................ 95 D. DRCM and FIRC Secretly Take on Enormous Risks as They Focus on Subprime and Alt-A Mortgage-Backed Assets as Their Principal Investment and Trading Strategy ................................................................................................................. 97 1. DRCM’s Trading Strategies Emphasize Immediate Profits at the Expense of Exposing UBS to Enormous Market Risks .......................................... 97 2. The IB Privately Adopts an Equally Risky Strategy of Originating Subprime-Backed Mezzanine CDOs and Retaining the Resulting Super Senior Tranches ........................................................................................ 98 E. UBS Risk Managers and Traders Within IB and DRCM Manipulated Risk Control Indicators to Conceal the True Risks to Which UBS was Exposed ...... 106 1. VaR as an Externally Reported Indicator of UBS’s Risk....................... 107 2. DRCM and IB Employees Manipulated VaR to Conceal the True Market Risks to Which UBS Was Exposed ........................................................ 108 3. Tier 1 Capital Ratio as an External Indicator of Risk............................. 111 4. A $1.31 Billion Credit Default Swap Transaction Between UBS and a Hedge Fund Restricted to a $40 Million Investment Evidences Defendants’ Deceit ................................................................................. 115 F. UBS Concealed the True Value of Its Subprime Exposure by Manipulating Its Asset Valuations Throughout the Relevant Period ............................................. 116 1. UBS’s Valuation Policies During the Class Period................................ 116 2. External Market Conditions Required UBS to Adjust Its Carrying Values of Its Assets............................................................................................. 118 3. Internal Events Required UBS to Markdown the Carrying Value of its Assets Beginning in Q1 2007 ................................................................. 121 a) The Eventual DRCM Write-downs............................................. 122 b) Defendants Publicly Acknowledged UBS’s Exposure to Losses in the Subprime and Alt-A Mortgage Market ................................. 125 iii Case 1:07-cv-11225-RJS Document 102 Filed 05/08/09 Page 5 of 563 c) Defendants Had Actual Knowledge of the Impairment of UBS’s Subprime Alt-A Mortgage-Backed Assets as Early as April 2007 Due to UBS’s Secret Audit of DRCM and the IB....................... 127 d) UBS’s Closing of DRCM and the Termination of UBS Executives Concealed From the Market That the Carrying Values of UBS’s Subprime and Alt-A Mortgage-Backed Assets Were Materially Inflated........................................................................................
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