* Germany's HSH Nordbank not excused from losses
* "Near-total" loss on $500 mln investment alleged
* NY state appeals court reverses lower court filing
By Jonathan Stempel
March 27 Germany's HSH Nordbank AG may not
pursue a fraud case against UBS AG over a soured $500
million mortgage investment, a New York appeals court ruled on
Tuesday, reversing a lower court.
A five-justice panel of the New York State Appellate
Division in Manhattan unanimously found that HSH had not been
misled into assuming the risk of default on part of a $3 billion
credit default swap transaction.
The underlying portfolio was composed mainly of
mortgage-backed securities and instruments from real estate
investment trusts. Many went into default in 2008 as property
HSH claimed that UBS intended to move securities in and out
of the portfolio to minimize its own risk and benefit from
pricing inefficiencies, creating a conflict of interest.
But the appeals court said HSH could not recover for its
alleged "near-total loss" from having bought $500 million of
notes tied to the 2002 transaction, known as North Street
Referenced Linked Notes, 2002-4 Ltd (NS4).
"However much UBS's alleged conduct leaves to be desired as
a matter of business ethics, the undisputed documentary evidence
and HSH's own allegations eliminate, as a matter of law, any
reasonable inference that HSH justifiably relied on the
representations of which it now complains," Justice David
Friedman wrote for the panel.
The case is one of many accusing major lenders of misleading
investors or insurers about the risks of mortgage and other real
Tuesday's decision reversed an October 2009 ruling by New
York State Supreme Court Justice Richard Lowe allowing HSH to
pursue its fraud claims. Lowe dismissed other claims raised by
Philippe Selendy, a lawyer for HSH, did not immediately
respond to a call for comment. UBS spokeswoman Karina Byrne also
did not immediately respond to a request for comment.
HSH accused UBS of professing a misleading "faith" in models
used by credit rating agencies to assess the portfolio's risks,
even as it rejected those models for its own use.
It contended that UBS engaged in a form of "ratings
arbitrage" by selecting securities for the portfolio that were
mispriced relative to their ratings, and then using its own
superior knowledge to profit from those discrepancies.
Friedman said, however, that HSH was a sophisticated
investor that had assented to UBS's "inherent conflicts of
interest" in managing the portfolio, and had been warned of the
"HSH could have uncovered any misrepresentation of the risk
of the transaction through the exercise of reasonable due
diligence within the means of a financial institution of its
size and sophistication," the justice wrote.
The case is HSH Nordbank AG v. UBS AG et al, New York State
Supreme Court, Appellate Division, 1st Department, No. 4677.