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According to Bloomberg, UBS AG (UBS - Analyst Report) agreed upon a settlement over charges levied against it by the German lender - HSH Nordbank AG in a lawsuit filed in Feb 2008. The company was accused of selling risky debts. However, the financial terms of the settlement have been kept under wraps.

The Allegations

The German lender filed a lawsuit against UBS in the New York State Supreme Court over North Street 2002-4 collateralized debt obligations (CDOs). The securities offered were residential mortgage-backed securities (RMBS).

CDOs typically repackage bonds and other assets into new securities. These are not traded on a public exchange, allowing firms like UBS to generate fees through brokering deals between buyers and sellers. However, CDOs have performed miserably since these were invested in securities comprising sub-prime mortgages, which are known to have larger-than-average risk of defaulting in the market. Eventually, the market downturn ruined the investment banker's expectations, resulting in huge losses for the common investors.

The lodged complaint claims that UBS deceptively sold the sub-prime mortgage-linked securities that gradually failed. In addition, it misrepresented the value of instrument by providing materially misleading statements.

According to HSH Nordbank AG’s lawsuit, the investment followed UBS' guidance, which indicated that the market for such securities had stabilized and the time was suitable to invest. According to the lawsuit, UBS deliberately sold the investments despite knowing that these securities might fail to perform. The German lender's $500 million investment turned into huge losses in Mar 2002.

Others Facing Similar Issues

Last year, similar lawsuits have been filed against other banking majors, including JPMorgan Chase & Co. (JPM - Analyst Report), HSBC Holdings Plc. , Bank of America Corporation (BAC - Analyst Report), Morgan Stanley and The Goldman Sachs Group Inc.

Legal Woes Continue

Trouble has been brewing for banks for quite sometime now owing to fraudulent representations and breach of contract tied to RMBS. Banks face several other charges related to the sale of defective mortgage securities.

Litigation overhangs have been a common problem for major U.S. banks since the financial meltdown. In effect, these lawsuits are expected to tarnish their reputation and financials over time. However, investors and other financial institutions bearing the brunt of these faulty practices are expected to be fairly compensated.

Conclusion

With the settlement of the lawsuit, UBS plans to move forward with its business strategies. Moreover, pending lawsuits can further trigger financial hassles while tarnishing the company’s image. Therefore, it is in the interest of the company to resolve such matters at the earliest.

Currently, UBS retains a Zacks Rank #5 (Strong Sell).

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