(UBS) UBS AG Sued Over Sale of Risky MBS

UBS AG (UBS) seems to be in sticky waters yet again with litigation issues arising from the sale of mortgage backed securities (MBS). This time, the U.S. regulator for credit unions has sued UBS for misrepresentation of documents while selling MBS worth $1.1 billion to two credit unions – U.S. Central Federal Credit Union and Western Corporate Federal Credit Union, which collapsed later.

The Allegation

UBS has been accused by the U.S. regulator for credit unions — National Credit Union Administration (NCUA) of issuing misleading statements and omitting important details from the offering documents of the MBS in question.

This led to obscurity regarding the risks associated with the MBS when they were sold. The credit unions perceived them to be less risky when in fact, the securities bore substantial risk. Moreover, UBS has also been alleged of ignoring the underwriting guidelines specified in the offering documents.

As a result, when these MBS lost their value for defaults in the underlying assets, the value of investments of the credit unions in these MBS plummeted. Subsequently, the two credit unions collapsed, leading to a crisis in the credit union industry.

Others in the Same Boat

Similar suits have been filed in the past by NCUA against other big shots like JPMorgan Chase & Co. (JPM), Royal Bank of Scotland Group Plc. (RBS), Goldman Sachs Group Inc. (GS) as well as against Wachovia which is now a unit of Wells Fargo & Co. (WFC). Moreover, settlements have been reached by NCUA with Deutsche Bank AG (DB), Citigroup Inc. (C) and HSBC Holdings Plc. (HBC), worth over $170 million.

Our Take

Troubles for UBS are far from over as only recently, the company faced the wrath of Sealink Funding Ltd., which sued UBS for presenting misleading documents related to the sale of over $158.1 million in residential mortgage-backed securities. Moreover, the company is also being probed in the LIBOR manipulation scam.

We believe that such suits would lead to increasing litigation risks for UBS, which poses a menace for both the company’s image as well as its financials. If found guilty, it is liable to be fined by the authorities.

Often, the company itself opts for settlements in order to reduce litigation hassles. Such a step on behalf of the company exhausts its financials, which could have been instead invested in growth initiatives. We remain skeptical and wait to see what the future holds.

On the other hand, recoveries by NCUA would result in lowering of losses that arose from the failure of the credit unions.

The shares of UBS retain a Zacks #4 Rank, which translates into a short-term Sell rating.

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