UBS to Pay $1.44 Billion to Settle DOJ Mortgage-Bond Case (2)

UBS Group AG agreed to pay $1.44 billion to settle a long-running case over US mortgage-backed securities, resolving one of the bank’s largest outstanding legal issues as it works toward integrating Credit Suisse.

The settlement had been fully provisioned in prior periods, the Swiss bank said in a statement Monday. The case stems from a lawsuit filed by the US Department of Justice against UBS in relation to legacy residential mortgage-backed securities from 2006 and 2007 and related to the issuance, underwriting and sale of the securities, the bank said.

The agreement closes UBS’s biggest US legal headache, though remaining litigation over Libor, swap and stock-lending platforms and Bernard Madoff’s fraud could cost about $400 million to settle. The bank’s existing legal liabilities, which also include a French tax-evasion case, are now joined by lawsuits related to the acquisition of Credit Suisse.

UBS has previously guided that legal liabilities related to Credit Suisse could run to as much as $4 billion over 12 months, and asset mark-downs could come in at some $13 billion. In June, UBS closed the acquisition of its stricken rival which handed the Swiss bank a potential windfall gain in the tens of billions of dollars after the government-brokered rescue.

In 2019, a federal judge in Brooklyn, New York, denied UBS’s bid to dismiss the suit, which the DOJ brought in 2018. It accused the bank off selling tens of billions of dollars of residential mortgage-backed securities by “knowingly and repeatedly” making false and fraudulent statements to investors about the loans backing them.

What Bloomberg Intelligence Says:

UBS removes a long-time legal overhang with no added expenses as it announces an agreement with the US Department of Justice to resolve issues related to legacy residential mortgage-backed securities from 2006-07. The bank is fully provisioned for the $1.44 billion payment, appearing to be below BI’s earlier assessment of $2.6 billion in potential costs but consistent with our April view that a 1Q legal provision hinted at a lower value.

— Alison Williams, BI senior industry analyst

UBS argued the suit should be dismissed because it failed to allege sufficient facts to show motive, opportunity or “deliberately illegal behavior.” The bank also argued that the US failed to show “fraudulent intent” of any employees.

But US Judge Margo Brodie in Brooklyn ruled the case should go forward, saying the government’s complaint “alleges strong circumstantial evidence of conscious misbehavior or recklessness.”

The agreement resolves all civil claims by the DOJ linked to the Swiss bank’s legacy RMBS business in the US, the company said in Monday’s statement.

“The scope of this settlement should serve as a warning to other financial institutions – both large and small – of the significant penalties that can result when corporations misrepresent vital information to investors and undermine trust in our public markets,” Ryan Buchanan, US attorney for the Northern District of Georgia, said in a separate statement Monday.

(Updates with BI in sixth paragraph, further context)

To contact the reporters on this story:
Patricia Hurtado in Federal Court in Manhattan at pathurtado@bloomberg.net;
Myriam Balezou in Zurich at mbalezou@bloomberg.net

To contact the editors responsible for this story:
Tom Metcalf at tmetcalf7@bloomberg.net

Jeff Black

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