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UBS Wins Dismissal of Loreley Financing Lawsuit Over CDOs

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UBS AG won dismissal of a lawsuit brought by Loreley Financing entities, which sued the Swiss bank to recover $331 million in losses on collateralized debt obligations.

Loreley investment vehicles sued UBS last year over what it said were four fraudulent CDOs. One of them was arranged by UBS “at the behest of” Magnetar Capital, which was betting against the housing market and selected collateral for the securities, according to the complaint. Loreley claimed Magnetar’s short position had been concealed.

Justice Shirley Werner Kornreich of New York State Supreme Court in Manhattan threw out claims against UBS in a decision filed yesterday, saying Loreley had made a “massive bet” on the housing market, while Magnetar had “shrewd insight” that the subprime mortgage market would crash. Magnetar was not named as a defendant in the lawsuit.

“There is nothing in the complaint that indicates that Loreley particularly cared about Magnetar’s investment strategy,” the judge wrote. “Importantly, Loreley, as sophisticated investors, knew that there has to be deep pocketed counterparties to their long positions.”

Loreley Financing is a group of special-purpose entities based in Jersey, the largest of the Channel Islands, a U.K. dependency known as a tax haven. The entities were formed for long-term investing in CDOs, pools of assets such as mortgage bonds packaged into new securities, according to court documents.

Karina Byrne, a spokeswoman for Zurich-based UBS, didn’t immediately respond to an e-mail seeking comment on the decision. Marc Kasowitz, an attorney representing the Loreley entities, didn’t immediately return a telephone message and an e-mail.

The case is Loreley Financing (Jersey) No. 4 Ltd. v. UBS Ltd., 651785-2012, New York State Supreme Court (Manhattan).

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