In re UBS AG Sec. Litig.

IN RE UBS AG SECURITIES LITIGATION

Master File No. 07 Civ. 11225 (RJS)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Date: September 28, 2012

OPINION AND ORDER

RICHARD J. SULLIVAN, District Judge:

Plaintiffs bring this putative class action against UBS AG ("UBS" or the "Company") and a series of Individual Defendant executives, alleging violations of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) & t(a), and the United States Securities and Exchange Commission's ("SEC") corresponding rule, 17 C.F.R. § 24G.10b-5 ("Rule 10b-5").¹ Plaintiff Alaska Laborers-Employers Retirement Fund ("Alaska Laborers") also brings this action on behalf of all persons or entities that purchased ordinary shares of UBS in connection with the Company's June 13, 2008 Rights Offering (the "2008 Rights Offering"), alleging violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77k, 77l, & 77o, against UBS, a series of Individual Defendant executives, and seven underwriters (the "Underwriter Defendants") for the offering.²

Before the Court are two motions to dismiss - one from UBS and the Individual Defendants (collectively, the "UBS Defendants"), seeking to dismiss the claims under the Exchange Act, and one from the seven Underwriter Defendants who underwrote the 2008 Rights Offering, seeking to dismiss the claims under the Securities Act. For the reasons that follow, the Court grants both motions.

I. BACKGROUND

A. Facts³

Plaintiffs - the City of Pontiac Policemen's and Firemen's Retirement System ("Pontiac" or "Lead Plaintiff") and Teamsters Union Local 500 Severance Fund, the Council of the Borough of South Tyneside acting in its capacity as the Administering Authority of the Tyne and Wear Pension Fund, oregon Public Employees Board, and Alaska Laborers - bring this suit individually and on behalf of all other persons and entities who purchased or acquired registered securities issued by UBS from August 13, 2003 to February 23, 2009 (the putative "Class Period").⁴ Their Amended Complaint spans a grand total of 548 pages and includes 1,477 paragraphs. Because detailing each of the facts contained therein would prove unwieldy and would likely obfuscate the crux of the allegations at issue, the following recitation of facts provides only a brief overview of the litigation. However, in Part III, the Court will delve into the details of the pleadings as necessary to resolve particular legal challenges raised by the UBS Defendants and the Underwriter defendants, respectively.

1. The Three Alleged Frauds

Plaintiffs allege that, during the putative Class Period, UBS and the Individual Defendants violated the Exchange Act by issuing fraudulent statements with respect to: (1) UBS's mortgage-related securities portfolio (the alleged "mortgage-related securities fraud"); (2) UBS's Auction rate Securities ("ARS") portfolio (the alleged "ARS fraud"); and (3) UBS's purported compliance with United States tax and securities laws by UBS's Swiss-based cross-border private banking business for American clients (the alleged "tax fraud"). (Am. Compl. ¶¶ 1385-1477.) Plaintiffs' allegations regarding each of these alleged frauds are summarized in turn.

a. Mortgage-Related Securities

During the Class Period, UBS originated, underwrote, and invested in residential mortgage-backed securities ("RMBS") and collateralized debt obligations ("CDOs"). (Am. Compl. ¶ 163; Decl. of Robert J. Giuffra, dated Dec. 15, 2011, Doc. No. 174 ("Giuffra Decl."), Ex. 11 (Swiss Federal Banking Commission ("SFBC") Report, dated Sept. 30, 2008) at 6-7.) Most of the allegations in the Amended Complaint involve UBS's decisions regarding these RMBS and CDOsfollowing the filing of its 2005 Annual Report, in which UBS announced that it was "seeking to expand [its] fixed income business . . . by pursuing opportunities in . . . asset-backed securities." (Id. Ex. 17 (UBS 2005 Annual Report) at 46.) According to the Amended Complaint, UBS acquired at least $100 billion in subprime and Alt-A mortgage-related assets despite repeatedly representing to the market, from the fourth quarter of 2005 onward, that it sought to avoid "undue concentrations" of risks. (Am. Compl. ¶¶ 43-45.)

Plaintiffs allege that in June 2005, UBS formed the internal hedge fund Dillon Read Capital Management LLC ("DRCM"), ostensibly to manage: (1) the proprietary positions of UBS's Investment Bank (the "IB") in a controlled financial company; and (2) client money in a separate outside investor fund ("OIF"). (Am. Compl. ¶¶ 242-44, 250.)⁵ However, shortly thereafter, DRCM allegedly "embarked on a secret campaign to acquire CDOs and RMBS backed by subprime and Alt-A mortgage collateral." (Id. ¶ 26; see id. ¶¶ 41, 292-93.) Throughout 2006, as Plaintiffs acknowledge, UBS did disclose similar growth in the debt instruments of its IB, mainly due to the IB's increased positions in asset-backed securities. (Am. Compl. ¶ 307.)

According to Plaintiffs, the subprime market declined in mid-to-late February 2007 (id. ¶ 978 (internal quotation marks omitted)), affecting the price of lower-rated securities and causing DRCM to take markdowns on those securities (id.; Giuffra Decl. Ex. 13 (UBS Shareholder Report on UBS's Write-Downs, issued Apr. 18, 2008 ("UBS Shareholder Report")) at 12 & Ex. 14 (Answers to Questions Submitted by Ethos, Swiss Foundation for Sustainable Development ("Ethos Answers")) at 7, 9). In late February through early March 2007, following the decline of these lower-rated securities, DRCM, by way of Individual Defendant Hutchins, allegedly tested the stated values of DRCM's subprime assets. (Am. Compl. ¶¶ 30, 365.) The test revealed that a randomly selected portfolio of subprime assets, which was carried on DRCM's books at $100 million, was selling for fifty cents on the dollar. (Id.) Based on these results, DRCM eventually wrote down those assets; however, according to Plaintiffs, UBS concealed these writedowns by not specifically disaggregating for investors the assets that DRCM managed on behalf of UBS. (Id. ¶¶ 30-31.) Plaintiffs also allege that, in neither disclosing DRCM's internal test nor writing down its positions on its entire mortgage-backed asset portfolio, UBS committed securities fraud. (Id. ¶ 31.)

In April 2007, UBS's Business Unit Control reported to UBS's Audit Committee that, although "[t]he diminished market liquidity and transparency" in the first quarter had led to "a substantial reduction in the coverage of independent price testing of Subprime securities," UBS's AAA-rated super senior securities were a "net flat risk or low risk for valuation purposes." (Giuffra Decl. Ex. 13 (UBS Shareholder Report) at 22-23.) Moreover, on April 25, 2007, UBS's independent outside auditor Ernst & Young advised UBS's Audit Committee that "nothing had come to [its] attention to indicate that fair values [of UBS's portfolios] at 31 March 2007 were inappropriate." (Id. at 24.)

On May 3, 2007, after DRCM had written down some - but not all - of its mortgage-backed security assets, UBS closed DRCM, ousted Individual Defendant Costas, and fired Individual Defendant Hutchins. (Am. Compl. ¶¶ 387, 392, 1035-36.) According to Plaintiffs, as a result of DRCM's closing, UBS's IB took on "$20 billion in subprime and Alt-A mortgage-backed holdings" that, "unbeknownst to investors, were materially overvalued." (Id. ¶ 37.) UBS announced the closing of DRCM and the redemption of its OIFs in its 1Q 2007 Form 6-K, filed on May 3, 2007. In that filing, UBS reported that its first quarter results included "negative trading revenues from the [UBS IB's] proprietary capital managed by DRCM of approximately . . . 150 billion [Swiss francs ('CHF')] in the context of difficult market conditions in US mortgage securities" (id. Ex. 30 at 1) and indicated that "[t]he US sub-prime mortgage market suffered a major dislocation in February resulting in significant markdowns and reduced liquidity" (id. at 5).

The market continued to decline throughout the remainder of 2007, ultimately suffering a "severe[] disclocat[ion] in the summer of 2007," which directly affected UBS's AAA-rated mortgage-related securities. (Am. Compl. ¶ 314.) As a result, in UBS's 2Q 2007 Form 6-K, filed on August 14, 2007, the company acknowledged that "[c]ontinuing bad news about collateral values on US sub-prime mortgages triggered sharper declines in credit markets in the second half of June [2007]." (Giuffra Decl. Ex. 32 at 5.) UBS also announced that it had sustained losses in its mortgage securities market -specifically, in "some of DRCM's former portfolios" - and warned that uncertain market conditions threatened the IB's future profits. (Id. at 1 -2.)

According to Plaintiffs, in "acquir[ing] high concentrations of highly illiquid subprime and Alt-A mortgage-backed assets in contravention of UBS's risk management policy and public statements" and in manipulating risk measures and "materially overvalu[ing]" its mortgage-related securities portfolio, UBS "concealed the truth from investors [about its mortgage-related securities portfolio] until October 30, 2007," when UBS began the first of what would eventually total $48.6 billion in asset writedowns during the Class Period. (Am. Compl. ¶ 60; see id. ¶¶ 5-6, 61, 317, 319-20, 483, 489, 492, 498, 1109.)

b. ARS

In addition to allegedly concealing its exposure to mortgage-related securities, UBS allegedly concealed its exposure to ARS.⁶ Throughout the Class Period, UBS held and offered ARS as an investment option to its wealth management clients, underwrote ARS on behalf of issuers, and sponsored the Dutch auctions at which the securities' interest rates were reset and determined. (See Am. Compl. ¶¶ 396-408.) According to the Amended Complaint, as early as August 2007, UBS executives became aware that "the demand for ARS was plummeting and [that] UBS had less capital available to support future auctions." (Id. ¶ 403.)...