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Financial Times: HSH lawsuit claims UBS ‘acted fraudulently’ (*Shell CFO Peter Voser is a director of UBS)

By James Wilson in Frankfurt
Published: February 27 2008 00:39 | Last updated: February 27 2008 00:39

HSH Nordbank says alleged “fraudulent acts and wilful breaches of duty” by UBS led to a $275m fall in the value of a portfolio of credit derivatives sold to it and managed by the Swiss bank, according to a lawsuit filed in the US.

The German public sector lender accuses UBS of deliberately selecting inferior collateral as part of a complex credit default swap, enabling UBS to profit from North Street 4, a collateralised debt obligation in which HSH invested. “UBS exploited the structure for its own ends, at HSH’s expense,” the lawsuit claims.

“UBS evidently regarded North Street 4 not as an investment platform but as an opportunity to defraud HSH.”

UBS on Tuesday denied all the allegations made in the lawsuit, filed on behalf of HSH in New York on Monday. “UBS … intends to defend itself vigorously,” it said.

The progress of the legal case will be closely watched by investors in, and managers of, subprime products that have now soured, because it may precipitate more legal action to recover losses.

HSH, one of whose constituent banks bought the $500m CDO in 2002, claims that the structure created by UBS allowed the Swiss bank to “realise a day-one closing profit of up to $120m at the expense of HSH”. UBS later more than doubled its profit at the expense of HSH to “a staggering $275m”, HSH alleges.

The lawsuit also claims that Dillon Read Capital Management – the subsidiary set up within UBS, which was closed down last year – made $555m of substitutions last year to a “reference pool” of securities linked to the CDO. By bringing in securities linked to the ABX index of subprime mortgage instruments, the exposure to home equity loans was increased $49m “at a time when the outlook on subprime mortgages was already negative”, the HSH lawsuit claims.

HSH is described in the lawsuit as “a regional German bank with little familiarity with international structured finance”.

UBS on Tuesday said HSH is “a professional and sophisticated market participant”.

“The products were tailored to satisfy the counterparty’s demands. UBS invited HSH to discuss a mediation but HSH refused,” said UBS.

Additional reporting by Paul J Davies in London

Copyright The Financial Times Limited 2008

Headline information in brackets added by John Donovan

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