UBS Loses KWL Case as Judge Says Bank Wasn’t Honest, FairKit Chellel
UBS AG lost a U.K. lawsuit over derivatives sold to Kommunale Wasserwerke Leipzig GmbH, with a judge criticizing a “corrupt” deal between a “maverick” bank employee and consultants advising the German water utility.
Judge Stephen Males said former UBS employee Steven Bracy was aware of a conflict of interest and knew the advisers at a Swiss consulting firm were dishonest. The consultants, Juergen Blatz and Berthold Senf, were convicted in 2011 by a German court of bribing a KWL executive in relation to the deal.
“Neither UBS nor KWL emerges with credit from this saga,” Males wrote in a 325-page decision. “For UBS it has been a case study in how not to conduct investment banking in an honest and fair way.”
UBS argued KWL owed about $140 million in a trial ending in July that included accounts of corruption, bribery and a party with strippers. The case is the latest over financial products that turned out to be costly for clients, ranging from European municipal governments to Libya’s $60 billion sovereign wealth fund.
KWL can rescind the swap agreements, although it must make some payments to UBS under the terms of the collateralized-debt obligation trades, Males said.
The bank is “extremely disappointed” with the ruling and said it would appeal in an e-mailed statement. It said the judge had found UBS knew nothing about the “corrupt arrangement” between KWL and the Swiss consulting firm that led to the bribe.
A woman answering the phone at Bracy’s address in Florida said he wasn’t there.
The transactions with UBS have been set aside, KWL’s lawyer Michael Barnett said in an interview. He said the ruling was a “slam dunk” for the German company, which provides water to the city of Leipzig.
KWL was for many years “run by a criminal who was able to plunder the company for his personal gain,” Judge Males said. KWL executive Klaus Heininger was convicted by a German court along with Blatz and Senf in 2011. “Although UBS was not aware of that bribe, I have held that UBS was responsible in law for its payment” because of the bank’s relationship with the Swiss consultants, Males said.
At the U.K. trial, the judge heard how Bracy, who left UBS in 2008, had such a close relationship with Blatz and Senf that he spent about $7,000 on an evening with strippers in New York and went on safari with them, even as they were advising KWL. Bracy intended that the Swiss consulting firm, Value Partners Group AG, would find clients for UBS, Males said.
Value Partners and Bracy “saw themselves as working together to ‘deliver the client,’ for which they would all be handsomely rewarded,” according to Males.
The judge wrote that Bracy “was a thoroughly dishonest man and dishonest witness.” Blatz and Senf entered into a “corrupt arrangement with a maverick banker at UBS who was allowed far too much autonomy, with a view to ripping off not only KWL but their other clients as well.”
“A huge burden has been lifted from the city and its citizens,” Burkhard Jung, Leipzig’s mayor, said in a statement. “The risk of financial liability that placed enormous strain beyond anything we’ve known on our budget has now been removed.”
The case is UBS AG v Kommunale Wasserwerke Leipzig GmbH, case no. 10-50, U.K. High Court of Justice, Queen’s Bench Division.