UBS Didn’t Force German Utility to Buy Swaps, Bank Lawyer Says

UBS AG didn’t make German water supplier Kommunale Wasserwerke Leipzig GmbH accept a complex transaction that the utility says exposed it to potential losses of more than 300 million euros ($414 million), a lawyer for the bank told a London court.

The lawyer for the bank said the blame was with the city of Leipzig’s water supplier and its former managing director, Klaus Heininger, who was convicted by a German court of accepting bribes from advisers who helped arrange the deal. When Heininger presented the deal to KWL’s supervisory board in 2006, the board asked no questions, the lawyer said.

UBS says it’s owed about $138 million by the utility under the terms of the transactions, credit-default obligations in which KWL assumed guarantees for unsecured loans related to leases on equipment. The products were designed to protect against rising interest rates, a strategy that backfired for many borrowers after rates plummeted in the wake of the 2008 financial crisis.

“At no time did UBS try to push this on KWL,” Charles Falconer, a lawyer for the Zurich-based bank, told Judge Stephen Males on the first day of trial today. “KWL is not an innocent party in this. It is corrupt at its core. Herr Heininger knew exactly what it was doing.”

KWL spokeswoman Katja Glaess didn’t immediately return a telephone call seeking comment. The utility said in court documents that the deals aren’t valid because they were sold on the basis that they would reduce risk when they actually increased the danger of losses. In addition, the swaps were the result of bribes paid to Heininger by the middlemen, KWL said.

Government agencies from Italian towns to Libya’s sovereign wealth fund have sued investment banks over products they say they didn’t need or understand.

“UBS has brought a court action to recover monies owed by KWL under a number of derivatives contracts which UBS believes to be valid,” the bank said in a statement. “UBS considers the allegations made by KWL in the litigation that it is not obliged to make any payment to UBS to be unfounded.”

The case is UBS AG v Kommunale Wasserwerke Leipzig GmbH, case no. 10-50, U.K. High Court of Justice, Queen’s Bench Division.

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