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Recently, UBS AG (UBS - Analyst Report) resolved a lawsuit filed by Assured Guaranty Ltd. (AGO - Snapshot Report) in a U.S. district federal court in Manhattan. The Swiss bank agreed to pay an initial amount of $358 million to settle the charges levied against it. Further, UBS entered into a collateralized loss-sharing reinsurance agreement to compensate a part of future losses incurred by the plaintiff.

In a lawsuit filed against the Zurich-based bank in Feb 2012, Assured accused it of misrepresenting the quality of the loans underlining $1.49 billion of mortgage-backed securities (MBS) insured by UBS.

During 2006-2007, Assured had provided financial guaranty insurance, which warranted that if cash flows from the mortgages were inadequate for paying investors their dues, it would cover those losses. However, a large number of these loans defaulted as they did not match the standards that UBS had set.

Further, Assured received permission to sue UBS for providing misleading information to the major rating agencies – Standard & Poor's (S&P) and Moody's, a unit of Moody's Corp. (MCO - Analyst Report) – as it was a breach of agreement. The company had placed a condition that MBS should be rated ‘AAA’ or slightly lower for receiving guarantees. It alleged that UBS, in an effort to get higher ratings for these risky MBS, offered fraudulent data to the rating agencies.

Earlier, in Aug 2012, a U.S. district judge dismissed part of the litigation under which Assured demanded that UBS should repurchase $1.6 billion worth of these faulty mortgages. However, Assured was granted sanction to proceed with the rest of the litigation.

Legal Woes Continue

Trouble has been brewing for major banks in recent times due to fraudulent representations and breaches of contract. These banks face several other charges related to the sale of defective securities.

Litigation overhangs have been a common problem for these banks since the financial meltdown. In effect, these litigations are expected to cause huge expenses, tarnish their reputation and be an overhang on the financials over time. However, the measures being undertaken by the regulatory and legal authorities to come down hard on such unwarranted activities will provide huge relief to the affected investors and other financial institutions.

Conclusion

With the settlement of the lawsuit, UBS plans to move forward with its business strategies. However, 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 carries a Zacks Rank #3 (Hold). Better performing foreign banks include Deutsche Bank AG (DB - Analyst Report), which carries a Zacks Rank #2 (Buy).

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