UBS Must Face Loreley Fraud Claim in Lawsuit Over CDO Losses

UBS AG must face a two-year-old lawsuit accusing the Swiss bank of hiding a bet against the housing market that led to $331 million in losses on collateralized debt obligations, a New York state appeals court ruled.

Loreley Financing, a group of investment vehicles based in the Channel Islands, sued Zurich-based UBS and other banks in 2011 and 2012, accusing them of misrepresenting the quality of the holdings in the CDOs -- pools of assets such as mortgage bonds packaged into new securities.

Loreley sued UBS over what it said were four fraudulent CDOs, one of which was arranged by UBS “at the behest of” Magnetar Capital LLC, a hedge fund that had bet against the housing market and selected the collateral for the securities, according to the suit.

Justice Shirley Werner Kornreich threw out the suit in April 2013, saying that Loreley’s losses were the result of a “massive bet” on the housing market. An appeals court in Manhattan today reinstated a single fraud claim, citing its May decision ordering Citigroup Inc. to face a similar suit from Loreley over CDOs valued at almost $1 billion.

Yasmin Thompson, a spokeswoman for UBS, didn’t immediately respond to an e-mail seeking comment on the ruling.

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 companies were formed for long-term investing in CDOs, according to filings in the case.

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

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