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[LONDON] UBS lost a multi-million dollar court battle on Tuesday against Germany's Leipzig water authority KWL over complex derivatives, although the judge said neither side had emerged from the saga with credit.
Judge Stephen Males described the litigation as "a case study in how not to conduct investment banking in an honest and fair way", adding that a maverick UBS banker had been allowed to rip off KWL (Kommunale Wasserwerke Leipzig) and other clients.
But he said KWL had for years been run by "a criminal who was able to plunder the company for his personal gain and ... enlist the support of his fellow managing director in covering his tracks".
UBS said it was "extremely disappointed" with the ruling in London's High Court and would appeal the judgment.
UBS and two other banks claimed that KWL owed them roughly 350 million euros (US$438 million) after complex derivatives contracts went sour in the wake of the 2008 credit crunch, according to KWL's London lawyers Addleshaw Goddard.
The colourful tale came to a head in 2011 when former KWL managing director Klaus Heininger and two consultants were convicted in Germany for offences such as fraud, bribery and embezzlement. All three lost appeals this year.
According to Tuesday's judgment, the two Value Partners consultants - former bankers Berthold Senf and Jürgen Blatz - plied Heininger with extravagant gifts, expenses-paid luxury trips, a cash payment of 945,945 euros and a 150,000 euro donation to the Leipzig football club he supported.
The judge noted that UBS was unaware the corruption extended to the derivatives transactions, with the three men conspiring to extract the greater part of the upfront premium paid to KWL for their own personal benefit. "It is to be hoped that the events described belong to a bygone era," Judge Males said. "As most of the main participants have moved on, and many of them are no longer employed in the banking industry, there is room to believe that to be so."
The case hinged on credit protection deals that KWL sold to UBS and two other German banks, LBBW (Landesbank for Baden-Württemberg) and Depfa, in 2006 and 2007 on investment grade bonds and other securities.
These deals, linked to products KWL was itself purchasing from the banks, left the authority liable to pay up to hundreds of millions of dollars in the event of default.
Even Depfa noted surprise in November 2008 that a municipal water company should engage in the speculative and highly risky business of selling credit protection.
In an internal email, published in Tuesday's judgment, Depfa staff wrote: "You have to wonder what in the name of God a utility company were doing selling protection on this portfolio!! They must have been persuasive UBS salesmen!!!" Under the terms of these deals, a limited number of defaults in the corporate bonds underlying the derivatives would trigger massive payment obligations for KWL.
When the credit crisis struck and default loomed, KWL declared the claims void.
Part of KWL's defence against the claims hinged on the argument that its adviser, Swiss consultancy Value Partners, was also a UBS agent, making the bank responsible for its actions.
The judge agreed. He said a bribe paid to Heininger by Value Partners came within the scope of an "agency relationship" which made UBS responsible for it in law. He added that UBS also knew Value Partners was subject to a conflict of interest.
Lawyers Addleshaw Goddard said KWL was ordered to pay back about US$33 million in premium payments that it had received under the transaction.
Many European bank clients prefer to bring cases against banks in continental Europe, believing their home courts are more sympathetic to their claims. KWL had also fought hard to avoid its case being heard in London.
But the judge noted: "Litigation is not like football. It is not always an advantage to play at home."
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