UBS AG ( UBS )
seems to be in sticky waters yet again with litigation issues
arising from the sale of mortgage backed securities (MBS). This
time, the U.S. regulator for credit unions has sued UBS for
misrepresentation of documents while selling MBS worth $1.1 billion
to two credit unions - U.S. Central Federal Credit Union and
Western Corporate Federal Credit Union, which collapsed
UBS has been accused by the U.S. regulator for credit unions --
National Credit Union Administration (NCUA) of issuing misleading
statements and omitting important details from the offering
documents of the MBS in question.
This led to obscurity regarding the risks associated with the MBS
when they were sold. The credit unions perceived them to be less
risky when in fact, the securities bore substantial risk. Moreover,
UBS has also been alleged of ignoring the underwriting guidelines
specified in the offering documents.
As a result, when these MBS lost their value for defaults in the
underlying assets, the value of investments of the credit unions in
these MBS plummeted. Subsequently, the two credit unions collapsed,
leading to a crisis in the credit union industry.
Others in the Same Boat
Similar suits have been filed in the past by NCUA against other
big shots like JPMorgan Chase & Co. ( JPM ),
Royal Bank of Scotland Group Plc. ( RBS ),
Goldman Sachs Group Inc. ( GS ) as
well as against Wachovia which is now a unit of Wells Fargo
& Co. ( WFC ). Moreover, settlements have been reached
by NCUA with Deutsche Bank AG ( DB ),
Citigroup Inc. ( C ) and
HSBC Holdings Plc. ( HBC ),
worth over $170 million.
Troubles for UBS are far from over as only recently, the company
faced the wrath of Sealink Funding Ltd., which sued UBS for
presenting misleading documents related to the sale of over $158.1
million in residential mortgage-backed securities. Moreover, the
company is also being probed in the LIBOR manipulation scam.
We believe that such suits would lead to increasing litigation
risks for UBS, which poses a menace for both the company's image as
well as its financials. If found guilty, it is liable to be fined
by the authorities.
Often, the company itself opts for settlements in order to
reduce litigation hassles. Such a step on behalf of the company
exhausts its financials, which could have been instead invested in
growth initiatives. We remain skeptical and wait to see what the
CITIGROUP INC (C): Free Stock Analysis Report
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On the other hand, recoveries by NCUA would result in lowering of
losses that arose from the failure of the credit unions.
The shares of UBS retain a Zacks #4 Rank, which translates into a
short-term Sell rating.