“You have to wonder what in the name of God a utility company were doing selling protection on this portfolio!! They must have been persuasive UBS salesmen!!!”
“MR JUSTICE MALES: To be blunt about this -- and you haven't, of course, seen all of the evidence in the case, or heard all of what Mr Bracy had to say about this -- but in your opinion, would it be fair to say that on the face of these emails, if we take the whole run of emails that you have been shown at face value, there was something of a rotten apple in the UBS barrel? A. It's exactly what I would have said, yes. MR JUSTICE MALES: It rather looked from the expression on your face as if that was what you were thinking. A. Yes, precisely. MR JUSTICE MALES: And I wanted to see if that was right. A. Yes, indeed.”
“Q (by Mr Lord). There were going to be three elements. In terms of the CDO, the CDO was going to be sold into the market by UBS, and it was going to generate, I'm suggesting to you, three different sources of revenue: one for KWL as premium, secondly, to cover what the bank called "our transaction costs", and thirdly, the bank's profit on the deal, which the bank calls "the bid offer spread"? Those are the three income streams, aren't they, from the STCDO, in broad terms? A. Yeah. Q. And it's right, isn't it, that the proportionate split between those three elements, or beneficiaries, is not set in stone, but is usually the subject of negotiation, isn't it? A. As I said, sometimes yes, sometimes no. Q. Take a straightforward example. The bank could take less profit out of the CDO and more revenue could be paid to the counterparty by way of premium, couldn't it? A. It could, but we did find a fair number of counterparties who had, rather than trying to get, if you like, the best for themselves, had a target. They said: this is my target, if you get to this target, I will transact. If you don't get to this target, I will not transact. And we always liked it when clients gave us targets, because we tended to be able to make more money out of those transactions. But the fact that the client gave us a target in this case was not in any sense unprecedented. Q. But in the situation you've just put forward, where the client's given you a target premium figure, the counterparty is still going to be interested in the terms of the deal, isn't it, to make sure that the price of getting its target figure isn't a very risky trade that's allowing the bank to make a large profit on the CDO? So there will be negotiation of the terms, even where the counterparty has come along and said it has a target figure. That's right, isn't it, Mr Czekalowski? A. What I would say is that one reason why these STCDOs were a profitable business line for the bank is because it was almost impossible, given the complexity of the negotiations and structuring, for the client to be running two banks in competition up to the last minute, okay? The client pretty much, given the cost and complexity of the process, had to select a bank and then stick with that bank during the execution. When you know as a bank that you're in sole position on a highly complex product, where there's 200 different ways to move around value -- 200 is a figurative -- figure of speech, but many different ways to move around value, then it is difficult for the client to make a detailed comparison. And without the detailed comparison, it's hard for the client to negotiate, to make the kind of detailed push-back that you're asking for. In other words, the only way a client could really, at the last minute, push UBS to extract the best price would have been if there had been a second bank in there, say Deutsche Bank, also simultaneously pricing the same product, and if the client had been able to say, ‘Well, UBS, Deutsche is a million dollars better than you, can you improve by a million dollars? Yes or no?’ My point is there was only one bank in for that, you know, execution process, and that was UBS, so the client had kind of, without perhaps realising it, voided their ability to create price tension within the transaction. Obviously we weren't going to point that out to them. And they gave us their target and we -- you know, we could hit it, they were happy. Q. So paraphrasing: there were 200 ways for the bank to make money, because it had such a dominant position in this transaction, and KWL had voided their – your words -- voided their ability to create price tension within the transaction. What you mean by that, ‘voided their ability to create price tension’, what you're really saying there, Mr Czekalowski, is that KWL were really over a barrel here if they wanted to do this deal with UBS. That's what you're really saying, isn't it, that the bank held all the cards here? That's right, isn't it? A. If you go to a bank and you say, ‘I have to do a transaction within one month, and it's a highly complex transaction, I'm only talking to you, and my price target is X’, then you kind of have put yourself over a barrel, yeah.”
“This is nuts. … Wish we could find clients like that here.”
“Some CDO strategies -- in some CDO strategies, the client can consciously be trying to increase risk to increase their premium and their potential reward. In -- other CDO strategies are more conservative, there's a deliberate intent to reduce risk, reduce net risk and probably some risk transformation. Many transactions were designed to be sort of in the middle, to be in theory zero risk transactions, or zero net risk transactions, where the risk, although it had been transformed -- where the risk after the operation was approximately equal to the risk before the operation.”
“Q (by Mr Salzedo). The reality is clear for anyone who looks at it that the spreads, and the ratings, and the premium, and the enormous multiple between them, correctly identify that these tranches were massively more risky than the single names they replaced? A. No, I disagree with that for all the reasons I've already stated during the course of the day. Q. Including your acceptance that the market price does indicate, unless there's some reason to think otherwise, that the market at least thinks that these tranches are not risky, you still think they're not? A. I believe that KWL was fairly compensated for the risk it was taking on under the transaction. Q. That wasn't the question, was it, Dr Ellis? A. Yes, the STCDOs were certainly -- had a lower rating, and they certainly had a higher spread, and in that sense they could be viewed as being riskier. Q. And if you're right that the premium was fair compensation for that risk, then that is another factor that tends to suggest they were riskier, isn't it? A. Yes. Q. So your expert view would be that they were in fact riskier? A. They were risky, yes. Q. Riskier. A. Oh, sorry. I beg your pardon, I misheard. I thought you said they were ‘risky’. Q. No, riskier, for the reasons you have just identified? A. Yes.”
“I don't think you could describe it as reducing. What it was doing was reducing the idiosyncratic risk on four names and giving them a more diversified risk. But you can't describe it as reducing the risk, because they were getting an enhanced yield. So I think, by definition, if you're getting a better yield you're almost certainly taking more risk. Q. So is your evidence that you understood this transaction to be increasing the overall risk of the provincial water company? A. Yes. Q. You thought it was increasing their risk? A. If it was reducing the risk, I wouldn't have been concerned about its suitability. It was only because it was increasing their risk, and in certain circumstances -- Q. Yes. A. -- that that could be a substantial number, that I was concerned about it. Q. I understand. So you would have had no doubt when you were looking at this STCDO that it was going to increase the risk of the water company? A. Yes. Q. And that obvious increase in risk would have been obvious to anybody within the UBS deal team who knew anything about STCDOs, wouldn't it? A. Yes.”
“Q (by Lord Falconer). You would never characterise this transaction, as far as KWL are concerned, as a high risk transaction? A. I would regard it as bearing significant risk. It is -- the way tranche structures work is that you have X number of defaults in a portfolio that can actually happen before your principal is affected. I can't remember the exact number, but I think six or seven names had to default in the market. There are 200 names in the reference portfolio that they were investing in. Six or seven names of those had to default before their principal was affected. After that point, their principal is getting marked down very aggressively. The tranche width, as you can see, is 1.5 per cent, which is quite thin in these sort of transactions. The subordination level is quite low. So there was significant risk in that transaction. But as I said, I took significant comfort from the fact that GAM, UBS, had basically structured this deal for them, they were trying to reorganise their credit exposures, but there was risk in that deal. Q. Well, there was risk, but it did not look, as far as you were concerned, inappropriately high risk? A. I think it was significant risk. I briefly looked at the reference names that were in the portfolio, those names seemed to be of reasonable quality, in my opinion. Q. There were 160 of them? A. Yes. Q. So you are saying there was risk in this? A. Yes. Q. And the risk was the full amount of the notional if it went really wrong? A. Yes.”
“Given my concerns about the appropriateness of this transaction, considering the potential impact of an extreme stress event on the financial standing of client the client suitability determination and diversification benefit rationale were referred to and approved by Global Head of FI (Bunce) and IB CEO (Jenkins).”
“like always great talking to you!! Would be really wonderful if we could work together on this new product. I can assure you that we would have the right clients. Take care and talk to you soon.”
“We've talked already to the client and got a positive feedback on the product briefly explained to them. Please note, that this client is high yield minded and expects a risk weighted return.”
"They heard about our restructurings and feel very strongly that they can deliver the client. The value is 255 US. They feel the client would like to see a AA cdo with aggressive structure to maximize yield (up front dollar value), as well as a moderate structure for comparison. These guys have more to come as well."
“I told him that I think it would be best if I passed this info to you guys to see where you guys would feel comfortable to approach the client about restructurings and to act as the advisor to the client this way we keep control of the process through you guys which helps ed as well as giving you guys more opportunities with respect to ubs. when you get a chance give me a call.”
“It looks like that david shulman will hire ed maron to help me out in the states (which gives us his list to pursue with v-partners which I passed to you a couple of months ago).”
“Furthermore, the incorporation of the CDO structures increases the underlying rates of return, compared to the present individual debtors. An increase in value is mainly achieved as a result of the efficient capital structure.”
“It was great talking to you and your London guys. I am sure we will make a lot out of it. Just for your info: Our client is very much money minded - so please make sure your colleagues are pricing very competitive and fast. I am firmly believe if this is the case we get the clients go ahead already by next week.”
“Richard want to put together the party!”
“Frankly, you guys have their [i.e. UBS’s] attention and assuming we can work out our internal issues, you could be an exclusive finder for clients for us (basically, you can have a unlimited list of folks to market because you would have proven your credibility and why would anyone argue that result (private conversation between me and Oscar that we would both argue to our bosses that you guys should have first pick over potential clients as opposed to our internal coverage bankers) to do this, Oscar and I feel we can give up revenue (or groups) to pay the European coverage bankers on ‘your’ deals to make them happy so they can't complain if they are getting paid too.”
“captive clients … that will do what they recommend”) reflects what Mr Senf and Mr Blatz had told him. (Indeed in a later email, dated24 April 2007 , Mr Bracy contrasted the “control” which Mr Senf had over KWL with his relationship with another potential client). The parties to whom the relationship was to be “mutually beneficial” were UBS and Value Partners. Once again, it is evident that Mr Bracy saw the relationship as one in which UBS and Value Partners would work together to deliver the latter’s “captive clients” to UBS for STCDO transactions with a total expected transaction volume of US$500 million . His purpose in writing was to ensure that his boss knew what he was doing and to ensure that his efforts on behalf of UBS were appropriately rewarded by what he described as “an equitable split of firm revenue”
“Don't talk about absolute numbers and if, always gross numbers before cost. The product should be explained in general and not related to a specific deal. Later on he decides how we start and what he wants to get done until end May, beginning of June. It is important to explain the advantages of the product (multiple credit risk versus single credit risk ... ). In addition to that you should mention other clients and closed deals.”
“- Limit the Value at Risk per credit, reducing single credit event risk - Maintains high credit quality (or alternatively can be adapted to suit KWL's risk/reward appetites) - Provides a more cost efficient solution and enables monetisation of enhanced yields as upfront cash benefits - Is a solution that is actively managed and controlled by professional, global portfolio managers thereby enabling greater rating stability - Provides continual flexibility to adjust risk profile.”
“The restructuring will provide KWL with a tailored and structured CDO investment that allows ongoing flexibility to manage the risk profile and realise an upfront cash benefit.”
“Risk exposure of any single name credit is removed, and replaced with diversified portfolio of credits, thereby reducing unsystematic risk Risk exposure is thus diversified across regions, sectors and corporates.”
“Should losses in the portfolio accumulate beyond 4% (I.e. more than 6.7 defaults assuming [40%] recovery rate), then the investor's capital begins to write down - The investors capital would be fully written down when the losses in the portfolio accumulate beyond 6% (equivalent to 10 defaults) The tranche would be rated [Aa] as rating agencies assess that the probability of incurring 4% or more losses in the portfolio is very low, and commensurate to a [Aa] rating investment.”
“The current trade that I brought in on KWL, which we got the mandate today for a firm June 9th closing (client want to close before the start of the World Cup) is expected to bring revenues to the firm of 25-30 million, assuming we can get through the usual complications.”
“One other thing amongst ourselves. Oscar and his team is working very hard on this and we have everyones attention. The person who did the german translation is one of the european marketers but he can be trusted as oscar and I have pulled him aside as to what our future plans with you guys are (tilo kraus, he reminds me of a young juergen blatz). He can be trusted and is on our side.”
“Guys, don't be too alarmed by Julian's e-mail. I spoke to Berthold and he has instructed me to do the following: for now on all pricing information is to go directly to Him and Juergen Blatz, we will let them handle Julian. The fact with Julian is that he is sensitive that his ‘intellegence’ on pricing matters is not being respected (generally, not specifically to this deal), as he is the ‘numbers’ person in their shop. The fact is that they are not talking to anyone else about doing the deal. He got his information from a guy at csfb who does not have the full picture. I am not suggesting that Julian is to be ignored and that his points should not be addressed. However, that is Berthold's and Juergen's problem which they know and want to manage within their shop. Also, they are the ones who are talking to the client directly (not Julian) as he will not be joining them in NY next week as well. Frankly, they had no idea he was going to send the e-mail so it caught them of guard as well, as I mentioned earlier that we had a very productive conversation before Julian weighted in.”
“Anyone else you want me to beat up?”
“ … Berthold and Juergen will be accompanying the client on the trip and frankly, relative to our ‘coverage’ with the DCM bankers there is no comparison. These guys directly or through client referrals ‘own’ Germany and Switzerland with respect to the public marketplace. I have spoken to them about your initiative in Europe and they would have no problem setting up meetings with their client base to advance the initiative.”
“If possible, I would love for you to stop by to meet the client and their advisors for several reasons. When we were in London, we showed them the trading floor which they liked (they like to be made to feel like they are important). it would be great if you could show them our operations on our floor as well, to make them feel important.”
“The IB [investment bank] will always try to get the best for us because internally there are brownie points for doing deals internally. These things are important to the MDs at the IB.”
“on the Closing Date, all necessary approvals and consents, including any governmental and regulatory approvals and/or consents and any legal opinions (as may be reasonably required by UBS and/or the Manager and/or KWL and/or the relevant rating agency with respect to the Transaction) shall have been obtained, in form satisfactory to UBS, the Manager, KWL or any rating agency, as the case may be.”
“KWL represents and warrants to, and agrees with UBS as follows: (a) This Agreement has been duly and validly authorised, executed and delivered by it or on its behalf, and shall constitute its valid and binding obligation enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganisation or other similar laws relating to or affecting creditors' rights generally, to general equitable principles, and to an implied covenant of good faith and fair dealing. (b) It is a sophisticated party with sufficient expertise to evaluate the risks and merits of any structure developed in connection with the Transaction. Without limiting the foregoing it has engaged or will engage (at its own expense) competent tax counsel, legal counsel and accountants to advise on such risks and it will rely exclusively on its own assessment of such risks. It is not relying on any communication written or oral of the other party as investment advice or a recommendation to enter into any Transaction in connection with this Agreement.”
“You [KWL] further represent, warrant and acknowledge and agree to and with us on the trade date:- (1) You are entering into the Transaction in good faith and in the course of carrying on your business. (2) The Transaction is (i) in your best interests, (ii) consistent with your business objectives and (iii) of corporate benefit to you. (3) You have obtained all necessary internal and external consents and approvals to enter into the Transaction, including but not limited to the approval of your board of directors. … (6) You have discussed the Transaction, and the accounting information that you intend to accord the Transaction, with your independent external auditors, and you will ensure that the Transaction, any related transactions and the effect of the Transaction and any related transactions (including effects on your financial condition) are accounted for, reported and represented in your accounts in accordance with generally accepted accounting principles and with appropriate disclosure …”
“As you know, this transaction was originated by and brought into the firm by me utilizing as advisors Value Partners who were former colleagues of mine at CSFB. We collectively worked on the original transaction for KWL.”
“I told them [Value Partners] that our guys [CRC] have no idea as to the operations so they do not fully understand that KWL is entering into the transaction for risk diversification with respect to their current leases by going from a static risk to a diversified risk with the additional benefit of the portfolio manager. That in connection thereto they have sought the advise of counsel, financial advisors, auditors and other persons in the organization. That consistent with the capacity opinion that Klaus [Heininger] in his current position has the authority to enter into the transaction and has notified the necessary internal parties and will notify other necessary parties under normal procedures.”
“Keep in mind the purpose is risk diversification with respect to the current lease collateral. Whereby KWL is going from a single name exposure to a pool of assets managed by a professional manager. Given the downgrade of AIG and the German bank situation, they felt it was prudent to investigate lease restructurings, especially given that others in the marketplace are examining it as well. All necessary approvals are in place, the accountants, lawyers, advisors (financial as well as internal) have been notified and consulted. We understand that there is a very limited risk that after a certain level of defaults we are subject to loss of principal and possibly the investment. We do feel however, that this risk is mitigated by the manager and the diversified portfolio. When compared with the existing risk with the current situation (single name exposure for the duration of the lease term) we think this is an acceptable risk.”
“Have executed one CDS last year (with Balaba in relation to a ‘tax driven UK lease’), first and only credit derivative transaction. This will be first CDO. Understand that CDS will help diversify credit risks and CDO is a diversified portfolio which will increase yields. Financial activities outside of water utility tariff agreements, provides opportunity for KWL to make additional returns. No further approvals are required, CEO/CFO can go ahead if he wishes. CEO believes that under the approvals obtained for X-Border Leases some years ago the CEO has sufficient authority to transact credit derivatives, no further authority from Supervisory Board is required. They have an opinion from Freshfields which reiterates this.”
“KWL through its advisors Value Partners has approached UBS and we believe other financial institutions. The product has thus not been actively recommended to KWL through UBS-IB or another UBS Business Group. Value Partners on behalf of KWL specifically asked for UBS capabilities on lease defeasance restructurings into managed CDOs.”
“Our issues are relatively simple. This is a small utility and the potential credit exposure is too large for the capacity of the company. Moreover, if the transaction goes wrong the reputation risk to UBS could be significant given KWL’s relatively unsophisticated profile, the fact that we are also the asset manager and that we have made 20 odd million dollars out of the deal.”
“CDO Swap is not linked to lease defeasance. The rationale of the CDO is to speculate on credit derivatives for yield pick-up.”
“… I am on my way to London to close a very profitable restructuring. So much so that Simon [Bunce] and Chris Ryan have got involved to ‘force’ internal credit to reverse their internal ruling and approve the deal.”
“Tilo, remember not to discuss dollars with the client. He is not to know”
“Q (by Mr Lord). Isn't the truth that what happened was that the profitability of this deal was such that Mr Jenkins was prepared to take upon his own shoulders the reputational risk to UBS? A. That's correct, yes.”
“1. UBS can only execute approximately half of the transaction directly with KWL (ie the portion related to the Balaba hedge only). The rest must be executed with a third party facing KWL, with UBS providing the CDS protection and hedging the third party on the CDO element. 2. Senior management from IBD Germany to support in writing the transaction and the importance of the relationship with KWL. 3. KWL must agree (to be evidenced to UBS) to inform the advisory board of the transaction with UBS. Language must be acceptable to UBS. 4. UBS to file Value Partners marketing material.”
“There wasn't any marketing materials from VP. We explained that at the time, hence reason for obtaining the letter from them.”
“Given my concerns about the appropriateness of this transaction, considering the potential impact of an extreme stress event on the financial standing of client, the client suitability determination and diversification benefit rationale were referred to and approved by Global Head of FI (Bunce) and IB CEO (Jenkins).”
“I don't think we could have done any more at the time; you even mentioned 'an extreme stress event' as being the reason for your concern on the appropriateness. You should rest easy on this one.”
“Since this transaction concerns a project that -- to our knowledge -- is being carried out for the first time in the Federal Republic of Germany, we point out that no case law or literature is available concerning the questions that are addressed in this opinion. It cannot therefore be ruled out with certainty that a court or a supervisory authority might adopt a position with respect to individual questions that differs from our results. It is open to question whether in this respect a resolution of KWL's Supervisory Board would be required in the relationship between the Managing Directors and the company.”
“Well, the individual arguments or aspects are of different nature and contradict one another partially, or stand contrary to one another, then in my office as a managing director, I have to balance out between the risk that a contractual conclusion may not be legally binding without the approval of the Supervisory Board, and the consideration of the Supervisory Board. Then no adviser or lawyer will help me, I have to take an entrepreneurial decision. And I personally, under these circumstances, would have thought about it a little bit longer, and if I decided on my own, then under these circumstances, I would have asked the Supervisory Board to consider it.”
“Corporate Power (b) KWL has the requisite corporate capacity to enter into the transaction contemplated in the Operative Documents. The execution and delivery of the Operative Documents by KWL, and the performance of its obligations thereunder, do not violate any applicable corporate laws or the Articles of Association of KWL. Due Authorization, Execution and Delivery (c) Each of the Operative Documents has been duly executed on behalf of KWL. While we have not verified whether the transactions contemplated in the Operative Documents have been authorized in accordance with the Articles of Association and with any standing orders or other internal guidelines of KWL, a violation of such requirements would not affect the valid execution and delivery of the Operative Documents, except in cases of fraudulent collusion.”
“If Freshfields has an issue due to hammersmith, then they can do it in a side letter to kwl and leave us out of it.”
“The reduction of risk is just one of many reasons for KWL to enter into the transaction. Beside the fact that the capacity opinion is not linked to the reasoning, there are other reasons for sure. Now it is really time to shift this to a more professional level! Klaus please instruct!”
“It should be noted that a German appeals court, while confirming the capacity of German municipal companies to enter into swap transactions, has recently held a bank liable on the grounds that it did not properly analyze and advise on the specific risk management needs of its local utility customer before recommending and entering into a currency swap (OLG Naumberg …)”
“(d) the term ‘enforceable’ as used in this opinion does not mean that an obligation will be enforced under all circumstances, but that the obligation is of the nature that is generally enforceable in German courts.”
“to tell you that we appreciate your efforts in helping to drive this transaction and working closely with the product groups to help this trade come to fruition. It is this type of collaborative effort that we in the IB want to see, and we want to ensure that you have the confidence in the system to understand that senior management across FIRC recognizes this contribution. This effort and your involvement as well as others in Europe will also be highlighted at the weekly Fixed Income Executive Committee. On behalf of the management team here, we thank you and hope that you will continue to push intra-divisional opportunities both domestically and internationally.”
“It has been a long, hard road and feels like the payoff is just getting started, so keep up the good work !!”
“Please help us stay connected to Value Partners and involved with future transactions. Nice work.”
“Actually, it is funny you mentioned that. I know from first hand experience when I worked with a couple of the principals from v-partners, and as they demonstrated with KWL, these guys have a very loyal client base.”
“Moreover, goldman and other firms have approached them to form a strategic partnership, amongst other, but they are loyal to us. I think it would be great to have a conversation with them on how to properly incent them to continue to bring us opportunities.”
“Q (by Mr Lord). I can see from your reaction, Ms Short, that you're not impressed by that email, are you? A. Well, they seem to be moving from a position of being an adviser to the client to being an introducer or arranger of business for us.”
“FYI - Berthold I aim to make you smile.”
“Very encouraging on the new business front. On the incentive side, there might be conflicts if we paid them for advising their clients to give business to us. Perhaps a broad cross referencing arrangement might be better or there may be other ways we could create value for them. If you would like, I would be glad to meet with them to discuss ways UBS could help Value Partners. Let me know if this would be helpful. Congratulations again. Please keep up the great cross business work. You are making a really good impression on David, Simon, Suneel, myself and others with your entrepreneurship.”
“With respect to the incentive issue, I am aware that it is best internally with our control functions that they should not be compensated directly by us for introducing us to business opportunities. I am confident that my long relationship with them, as well as the mutually beneficial opportunities for both firm[s] will ‘keep them in the fold’. However, I do think it is important that they see directly that senior management values their contribution(s), and if there is any way that we can assist them as a firm without creating a potential conflict situation that would go a long way as well. …”
“A number of emails have already been sent on this innovative and mile stone deal in Germany. I just wanted to reinforce the message that this collaborative effort across CFI, DCM and Munis was outstanding and resulted in a highly valuable transaction for our client. There is hopefully another leg of this trade to execute shortly. Great work by everyone in discovering this opportunity, marketing the advisor/client, and structuring an innovative transaction.”
“The restructuring and risk diversification of KWL's currently existing cross-border lease portefeuille will generate for the benefit of KWL an interest rate advantage over the term of the transaction. VPG hereby guarantees that the generated interest rate advantage will amount to at least€4.5 million . Depending on the development of the underlying credit portefeuille KWL may decide to distribute parts of the benefit during the term of the Transaction. Any additional interest rate advantage in excess of the€4.5 million will be for the benefit of VPG to cover any related fees and expenses. In addition, VPG agrees to cover any first year losses deriving from the Transaction up to an amount of USD 6.5 million.”
“[Mr Ryan] is the boss of the bosses boss boss. He wrote to Steve after we closed the deal that UBS should keep well connected to VPG. Our idea is to figure out whether they are willing to pay some money in order for us to bring deals to UBS instead of Goldman etc.”
“The meeting with chris went well. He was impressed with our collective efforts and he got along well with juergen and berthold. He is very supportive of future joint ventures with them.”
“It was a pleasure to meet you last Tuesday. We strongly believe that we have lined-up excellent business opportunities which we would like to push along with you and your colleagues.”
“… the city of zurich when they do swaps does it through a local bank when the treasurer does the deals. The concern is that if it is a swap that it would fall outside of beat's jurisdiction and thus, outside your mandate and thus outside your control to direct the business to us (as opposed to a competitor who the treasurer likes). I said that I believe that it would be viewed as part of a leasing transaction which is under beats jurisdiction ultimately and thus things should be along the lines we discussed.”
“One question I have is that if you guys get the mandate are you suggesting that we will have to compete with JP and Citi. I had assumed that if you have the mandate then you guys can ‘direct’ the business where you desire.”
“When we are mandated we will have an exclusive mandate for the lease. We would have the opportunity of steering SNCF in the right direction on defeasance but cannot guarantee that we can always get our preferred choice in. What I would like to do is present SNCF with the structure which UBS will do and hopefully that will get you guys in ahead of JPM et al. There will be limited time when we get the mandate so if we can get the UBS structure up and running first off then I don’t think there would be the time to bid it round.”
“I had lunch with phillip. At first he was sniffing about how and how much v-partners got paid. I played dumb basically I said not my issue or concern. He suggested maybe during our compliance process we might have discussed.”
“We purchase protection from KWL with three CDS on three CDO tranches, including 2 zero-coupons, see swaps confirmations. USB then purchases protection from us on the same CDO-tranches. UBS is the portfolio manager of the CDOs as well as the calculation agent for all swaps.”
“UBS will bear risk that KWL has no authority to enter into these transactions (ultra vires) due to the fact that UBS checked this issue already for its own transactions and feels comfortable with the informations received.”
“UBS will not bear this risk. We are comfortable that this is not a risk but LBBW must also make its own investigations.”
“I raised the ultra vires issue with Tilo several weeks ago and he confirmed that there are legal opinions from external lawyers confirming that KWL has the right to enter into these contracts and that we will see these opinions. It was never raised that we have to get our own opinion on this issue. Therefore, please let us discuss.”
“As you correctly said, Freshfields has looked into this issue and issued a legal opinion. This legal opinion addresses the ultra vires issue and the required approvals. The client/Freshfields/UBS will share this opinion with LBBW, however, LBBW needs to evaluate the associated comfort on its own behalf. I hope this clarifies.”
“The newly applied-for derivative deal is of a speculative nature and secures for KWL a short-term influx of liquidity. The risks generally consist in the default of a portfolio company and the corresponding credit default payment by KWL. For BW Bank / LBBW in summary there is the risk that in the event of a default by KWL and additionally the default of portfolio companies, the bank would have to pay corresponding default payments. Given the high significance of KWL for the region of Leipzig and the associated public interest in having a healthy company, but also due to the fact that KWL is one of the revenue generators in the shareholding portfolio of LVV, as investment company of the City of Leipzig, we consider the risk involved with this transaction as manageable and acceptable.”
“I can confirm that the terms of the scheduled payment obligations under paragraph 2 (Fixed payments) and paragraph 3 (Floating payment) of the back to back swap confirmation match the terms of the scheduled payment obligations under paragraph B2 (Fixed payments) and paragraph (B)3 (Floating payment) of the CDO CDS. There will be some basis risk arising as a result of using different master agreements to govern the two transactions and therefore I express no opinion as to the payment flows on any early termination of the back to back swap or the CDO CDS (arising as a result of a termination event or an event of default.”
“2. Diversification of hypothetical risk … 6. KWL receives interest yield as additional remuneration … 8. For the next few years, KWL will receive guaranteed minimum interest yield of about€ 4.5 mill.”
“Agenda Item 10 Further Risk Minimisation and Optimisation of the existing CBL contracts Mr Heininger explains in detail, with help of the handout, the UBS transaction to minimise and optimise the risk of existing CBL contracts. The Supervisory Board notes the statements.”
“Further risk minimisation and optimisation of the existing CBL agreements Mr Heininger explains, on the basis of the attached presentation, the transaction with UBS to minimise risk and optimise the existing CBL agreements. The Construction and Finance Committee approvingly notes the statements.”
“It is quite common for local newspapers to try to latch on to small expense irregularities among public officials. It happens here, it happens in Ireland, I am sure it happens in Germany.”
“Q (by Lord Falconer). So can I take it from that that you would have known that had you read the newspaper articles first of all that there were very substantial numbers of allegations in the German press alleging corruption against Mr Heininger and Dr Schirmer, the managing directors of KWL -- this is not dangerous territory for you to agree, that is what the newspaper articles – A. I have a slightly different opinion to you on that. Q. Okay. A. Because my reading of the articles was that local newspapers had picked up potential expenses, one of which involved a trip to New York, albeit on Concorde, to close a transaction, as it turned out. Another involved, you know, a conference room meeting in Dubai. These are normal practice in the capital markets. Now, a person who is not involved in capital markets might read those as very unusual: why would you be taking Concorde, why would you go to Dubai for a weekend? But every bank in the world entertains clients. Many people have to travel to New York at short notice to close transactions with particular deadlines. So your reading of that is -- my reading of it might be a little bit different to the way you are summarising. Q. Okay. Let's be clear about it. You wouldn't have been too bothered by the fact that people involved in the capital markets had taken Mr Heininger, say, that is the managing director of KWL, to Dubai, for a leisure trip? A. It is common practice. Q. It is common practice, and it wouldn't have undermined your faith in Mr Heininger? A. On its own, it wouldn't.”
“4) Did Mr Klaus Heininger make business trips by Concorde to New York? If yes, for what reason? What were the costs of the Concorde flights? And: who paid for the flights? 5) Was Mr Klaus Heininger also in Dubai and New York at the invitation of Global Capital Finance or its Swiss representatives, Berthold Senf or Herrn Lauterklos? If so, was he accompanied by his partner Susanna Schenck on these trips?”
“any more thoughts regarding yesterday's discussion? We informed our friend and he really appreciates your efforts!!!”
“any news on the letter for K? we should target to have something in hand by mid week. Please give us a call in order to discuss status quo.”
“Understand that people are not exactly lining up to commit ... you can fill in the rest. Anyway, I can't make people make such a decision before they are ready. Thus, I understand your time frame desires, but frankly, if and when people step up they will do so when they are ready (people read the news here too). We are waiting on 3 people to get back to us. We understand the timeframe, as do they. We are doing the best we can.”
“Keep this 2 yourself before you read. As to my earlier e-mail, I was running to catch a plane so if it came across harsh, it was not intended. I know you guys are under the gun on this one so ed and I are taking it very seriously. As I mentioned we have asked 3 people about it and 2 of them to our surprise were aware of the issue. Thus, it is difficult to say to folks ‘nothing further can possibly happen’. Instead we have had to focus on ‘even in the unlikely event something does there is no jurisdiction thus no harm to you’. As you can imagine the next question was ‘what's in it 4 me’. Anyway, we are working on the same timeframe as you. As a head's up we may have to deal with that second question.”
“That’s great, I’m glad it worked out.”
“Q (by Mr Lord): But it's right, isn't it, Ms Short, I'm sure you would agree, that there is something shockingly dishonest in Value Partners feeling able to contact a UBS banker to ask him to fabricate evidence to assist the managing director of a municipal water board? A. Yes, I think it's appalling. Q. And it's right, isn't it, that if that was the sort of relationship between Mr Bracy and Value Partners, that Value Partners felt able to make those sort of corrupt proposals to Mr Bracy, that that really calls into question anything that Value Partners and Mr Bracy did in relation to the KWL transaction as well? A. It has to, yes.”
“The objective of these transactions was to * Mitigate the single name concentration risk associated with the existing collateral assets (MBIA, ML, GECC, Balaba) * Replace this risk with that of a tranche of an actively managed diversified portfolio of assets * Structure the transaction without requiring any changes to current lease documentation or removal of the current assets that are pledged * Possibly achieve a net upfront cash benefit should market conditions be favourable upon execution.”
“In both transactions, KWL was able to achieve a net upfront cash benefit, as the premium received for accepting exposure to the CDO tranches was in excess of the cost of purchasing protection on the single name credits.”
“In return for accepting the risk on the CDO tranche, UBS pays to KWL a CDO premium as cash upfront. This cash payment is then utilised to fund the cost of mitigating the single name credit exposure.”
“I hope to have reviewed legal documents with our lawyers, also for early next week - one issue that I am not sure if we resolved was that of an indemnity from UBS (or KWL) that Depfa has not provided advice and will not be on the hook in the future - am thinking particularly of reputation risk.”
“we have been quite clear from the beginning … they are on the reputational hook for good or there is no deal. The only concession we made is that if we are not facing the client on our swap, we will get them out of theirs, so they are not on their own.”
“UBS is arranger of the transaction for KWL. This means that we finalised the structure following KWL criteria and objectives, and coordinate discussions with the rating agencies. UBS is not an advisor to KWL. Value Partners AG (a Swiss company specialised in Lease transactions) did the study on the transaction and was hired by KWL to do the transaction. They were the main point of contact for us, as they represented the client. Value Partners advised KWL with regard to the structure of the transaction and will advise them on the levels and when to execute the further transaction. KWL is a swap counterparty and so we consider them a client, and we had done our own due diligence on the trade and the client. Given that Depfa will be facing KWL on the swap, you must do the same. We are not advising you or KWL in respect of this transaction.”
“I am awaiting comments on docs from my lawyers, but we had our internal discussion on reputation risk / KWL capacity, and I wanted to come back to you with feedback: 1) We would need to have an ISDA with KWL - has this already been contemplated? Typically a law firm would provide an opinion on KWL's capacity to enter into the ISDA, and we would assume this to be at KWL's expense. 2) Assuming the law opinion in (1), this should provide us with sufficient comfort on KWL's capacity to enter into credit derivatives (in addition to our own internal due diligence). … 3) We would like to have a follow up call with our lawyers on the line to confirm the approval processes that UBS have been through. We want to ensure that the role of Depfa as an intermediary has been clearly communicated, and would be interested to understand how this improves the materiality concerns (given that we are neither providing advice or taking outright CDO risk in this trade). 4) Can you send us the articles of association of KWL?”
“As to 3, not sure where you are going here. Depfa cannot rely on UBS’s approvals. Depfa must assess its own suitability and capacity concerns and obtain such comfort as it sees fit.”
“happy to take the credit risk of KWL, but not other risks over which we have no control (mis-selling etc).”
“Final remaining concern is legal/reputational risk. KWL is public sector owned utility company and therefore CDOs somewhat outside of usual line of business. We have a weak legal opinion, KWL board approval, we can meet CFO ahead of trading, and in addition KWL will sign a risk disclosure letter (non-reliance, own advice sought etc). Clearly there is still a risk that if portfolio defaults and KWL decide to play the role of ‘stupid’ investor they can refuse to pay and we would have a legal problem. (German court ruled in favour of a muni in an fx deal in 2005). Against that we have transaction documentation, risk disclosure letter signed by KWL, and the portfolio is Aa3 rated corporate CDO so still fairly strong credit quality. What are your thoughts? David is concerned with the risk of the CDO defaulting and having to take KWL to court to be paid - perhaps I am being naive but I think this is a hypothetical risk that we should be willing to take. The deal offers good economics and such risks are always going to be more prevalent when dealing with public sector clients.”
“Clearly this is something you need to satisfy yourself.”
“3. Clarification that in light of § 96 3 (b) of the Gemeindeordnung Sachsen ("Rechtsgeschaefte von erheblicher wirtschaftlicher Bedeutung") a decision by a supervisory board is sufficient. 4. Clarification if the acceptance of the deal by a sub-committee of the supervisory board is sufficient or if we need the board's or even the shareholders' approval.”
“Freshfields should be able to send you a revised legal opinion shortly. Will add some additional language re public policy. However, supervisory board approval is NOT required. They will deal with this.”
“Have just spoken with Wiehler and agreed with him that the requirement of a Supervisory Board resolution is not an issue for the LO [legal opinion] but a question of Depfa's business policy, but that there will be no resolution in view of the practice [used] so far. Mr Wiehler will discuss this internally.”
“Daniel has spoken to the Depfa-guy. (See below e-mail). He explained to him on which basis the first two tranches were done (Management decision and after closing notification to the supervisory board). Wiehler will discuss internally whether this approach is acceptable to Depfa.”
“we have with your consent and without any further enquiry assumed ... that the validity of the Documents is not affected by any violation of procedural or substantive requirements which is not evident from the face of the Documents.”
“The managing directors' power of representation is, as a general rule, unlimited by law and may not be limited either by the company's articles of association, a shareholders' resolution, or in the managing directors' employment contracts or in any other way, § 37(2) Limited Liability Company Act.”
“The abuse of power doctrine (Missbrauch der Vertretungsmacht), which is rooted in the general private law principle of good faith (§ 242 German Civil Code, BGB) and which also applies to companies, is an exception to the general rule of § 37(2) Limited Liability Company Act that limitations of the authority of representation have no bearing on the power of representation. It states that a person may not rely on the unlimited power of representation if that person knows of the limited authority of representation or could not have failed to realise that such limits exist.”
“The abuse of power doctrine has two requirements: a) The agent must have acted beyond his or her internal restrictions, i.e. acted without authority of representation. b) The person contracting with the company must have known or could not have failed to realise that the agent acted without authority of representation.”
“The experts agree that the abuse of power doctrine does not only apply when the party contracting with the principal knows that the agent acted without authority of representation but also when this party could not have failed to realize that such restrictions existed. … The experts agree that a person cannot fail to realise that the agent is acting without authority of representation when due to massive/solid suspicious objective facts ("aufgrund massiver Verdachtsmomente") the existence of such restrictions was obvious ("evident") to the contracting party. Another way of stating the same requirement is that the violation of internal restrictions must have imposed itself ("sich aufdrangen") on the person contracting with the company. In other words, the test to be applied is that of gross negligence (grobe Fohrlässigkeit), i.e. the person contracting with the company must have failed to see what was plain for everyone to see if put into the shoes of the contracting party. Thus, while there is no general duty to inquire into the internal affairs of the company, the aforementioned conditions can be met when the need for an inquiry as to whether internal restrictions existed imposed itself on the contracting party due to massive/solid suspicious objective facts in the particular case.”
“The Defendant [LBBW] also had no duty to enquire whether or not any possible approvals had been granted … and to have these approvals, if any, submitted to it before the conclusion of the CDO transaction. [LBBW] neither had any positive knowledge of an abuse of the power of representation, nor must it have imposed itself [on LBBW] that the representative was using his power of representation in an obviously suspicious manner … As described above, the abuse of the power of representation is obvious only in circumstances of massive/solid suspicious objective facts, as opposed to merely suspicious objective facts … Matters can be deemed objectively obvious only when, according to the circumstances given, an inquiry with the principal being represented imposed itself on the contracting party … In this regard, an objective breach of duty is necessary, which is clearly and obviously recognisable to everyone ... A merely negligent lack of knowledge is not sufficient, as the legal regulation of Section 37 par. 2 of the German law on limited liability companies … does not have the purpose of requiring business counterparties to regularly check the power of representation of the Managing Directors …, and intends instead to protect the trust in sufficient authority of representation being given. For a breach of fiduciary duty to be clearly obvious in this sense, it is thus not sufficient if, from the vantage of the third party, the violation of internal obligations potentially is an obvious conclusion ... Likewise, the mere knowledge that the Articles of Association contain a reservation as to approval is not sufficient for determining that this was clearly obvious. On the contrary, [any such determination] must be based on specific circumstances ... The – disputed – assertion by [KWL] that [LBBW], or respectively BW-Bank, who had prepared the credit application for [LBBW] had access to [KWL’s] Articles of Association is thus already without relevance. The Articles of Association do not contain any express requirement to the effect that the conclusion of the CDS/CDO transactions requires the approval of the supervisory boards. Those of its provisions that can be taken into account in this regard are open to an interpretation based on values and in fact require such an interpretation…”
“(9) The approval of the Supervisory Board is required for the matters cited in Sec.8 Para.2 of the articles of association. The Supervisory Board can also, by resolution, stipulate its approval for further matters or value limits. (10) The value thresholds, for business transactions, which under Sec.8 Para 2 of the articles of association of KWL require the approval of the Supervisory Board are specified as follows: Acquisition, sale and encumbrance of properties and similar rights (Sec.8 Para.2 No.6) with a business value of over€250,000 The conclusion of lease, rent or leasing agreements (Sec.9 Para.2 No.7) with a term of more than ten years and an annual business value / lease or rent of over€25,000 . Decisions on investments not included in the Finance Plan where these exceed a value of€500,000 (Sec.8 Para 2 No.12)”
“Wider policy considerations also support the respondents' case that bribes and secret commissions received by an agent should be treated as the property of his principal, rather than merely giving rise to a claim for equitable compensation. As Lord Templeman said giving the decision of the Privy Council in Attorney General for Hong Kong v Reid[1994] 1 AC 324 , 330H, ‘[b]ribery is an evil practice which threatens the foundations of any civilised society’. Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world. That has always been true, but concern about bribery and corruption generally has never been greater than it is now – see for instance, internationally, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1999 and the United Nations Convention against Corruption 2003, and, nationally, the Bribery Acts 2010 and 2012. Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.”
“… I wish to reserve the question whether a party to a contract induced by the bribery of his servant by a stranger, or indeed a party to a contract induced by the fraud of a stranger, should not be entitled to rescind the contract on the discovery of the bribery or the fraud, on the basis that it would be inequitable for the other party, though innocent, to hold him to a contract so procured.”
“Zambia also plead that ‘the Settlement Agreement was sufficiently connected with such illegality and/or corruption so as to render it inequitable for Donegal to [be] permitted to enforce the Settlement Agreement against Zambia in this jurisdiction or at all, whether or not Donegal knew or was responsible for, or was party to, such conduct’. Zambia did not develop this point in their submissions except to draw it to my attention that in Armagas Ltd v Mundogas SA[1986] 1 AC 717 at p.745C Robert Goff LJ expressly reserved ‘the question whether a party to a contract induced by the bribery of his servant by a stranger, or indeed a party to a contract induced by the fraud of a stranger, should not be entitled to rescind the contract on the discovery of the bribery or the fraud, on the basis that it would be inequitable for the other party, though innocent, to hold him to a contract so procured’. As I understand it, this pleading was directed to an argument that Zambia would advance if Donegal were not responsible for improper conduct on the part of Mr O'Rourke, Mr Mwale or Mr Chilupe, and so, on the findings that I have made, this point does not arise. I therefore only say that if Zambia are relying upon any more general equity, I do not recognise the principle on which they rely.”
“… ‘[a] fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other’. Because of the importance which equity attaches to fiduciary duties, such ‘informed consent’ is only effective if it is given after ‘full disclosure, to quote Sir George Jessel MR in Dunne v English (1874) LR 18 Eq 524, 533.”
“The significant words, for the present purpose, are ‘if they have agreed to what amounts in law to such a relationship.’ These I understand as pointing to the fact that, while agency must ultimately derive from consent, the consent need not necessarily be to the relationship of principal and agent itself (indeed the existence of it may be denied) but may be to a state of fact upon which the law imposes the consequences which result from agency. It is consensual, not contractual. So interpreted, this formulation allows the establishment of an agency relationship in such cases as the present.”
“21. It is common ground that Mr. Van der List and Mr. Tissot both had authority to enter into port agency contracts and to make provision for rebates or commissions. The arrangements that they effected with Mr. Smith can be categorized as the conclusion by illegitimate means of a transaction that they were authorized to conclude by legitimate means. It follows that Alpina is vicariously responsible as a matter of English law for the fraud involved in those illegitimate means: see Hamlyn v. Houston & Co [1903] I KB 81.”
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”
“The remedy [of rescission] is not confined to cases where the agent has taken a bribe or secret commission in the strictest sense. It is available whenever, without his principal's knowledge and consent, the agent has put himself in a position where his interest and duty may conflict. A principal is entitled to the disinterested advice of his agent free from the potentially corrupting influence of an interest of his own. Any such private interest, whether actual or contemplated, which is not known and consented to by his principal, disqualifies him: see the Panama case, LR 10 Ch App 515, 528-529 and Parker v McKenna (1874) LR 10 Ch App 96, 118. It is immaterial whether the agent's mind has been affected or whether the principal has suffered any loss as a result: ‘the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that’: Parker v McKenna, at pp. 124-125 per James LJ; see also at p. 118 per Lord Cairns LC and Shipway v Broadwood[1899] 1 QB 369 , 373 per Chitty LJ. The principal, having been deprived by the other party to the transaction of the disinterested advice of his agent, is entitled to a further opportunity to consider whether it is in his interests to affirm it.”
“That in itself is not sufficient to entitle S. U. F. C. to a fresh opportunity, as against the plaintiffs, to consider whether it is in their interests to affirm the transaction. For this purpose they must establish that they were deprived of the disinterested advice of their agent by or at least to the knowledge of the plaintiffs. Is this condition satisfied? I have no doubt that it is. It is, of course, immaterial whether the initiative for the agent's taking an interest of his own came from the agent himself or from the other party to the transaction. It must also be immaterial whether the other party provided it directly or knowingly assisted the agent to obtain it, for example by diverting to himself or an associate a payment intended for his principal. In all the reported cases, the other party has provided it himself and has been fully aware of the agent's personal interest. There is, accordingly, no direct authority on the degree of knowledge which he must possess of the existence of the agent's personal interest. With one reservation to which I shall come in a moment, however, and which goes only to the facts of which knowledge must be proved, I accept the submission made on behalf of the plaintiffs that nothing less than actual knowledge or wilful blindness will suffice. In particular, constructive notice will not do.”
“The decision of the Court of Appeal in Bilta has achieved a welcome clarification of the law in this area. The general effect of the authorities discussed above can in my view be summarized in some short propositions. (1) Questions of attribution are always sensitive to the factual situation in which they arise, and the language and legislative purpose of any relevant statutory provisions: Tesco at pp 169-170, 194-195, 203; Meridian at pp 507, 511-512; Tesco No 2 at pp 1042-1043; PCW at p 1145; Group Josi at p 1169; Duke at para 615; McNicholas at paras 48-50; Morris at paras 116-124; Safeway at paras 29, 44-46; Bilta at paras 33-35, 45. (2) The “directing mind and will” concept in Lennard, although still often referred to in judgments, has been greatly attenuated by recognition of the importance of the factual and legislative context: El Ajou at pp 151, 154, 159; Meridian at pp 507-509 and 511; and numerous later cases. It might be better if it were to fade away as a general concept. (3) In some cases acts of directors and employees will be attributed to the corporate employer without their state of mind being so attributed: Duke at para 625, 641; MAN at para 154, illustrated by eg Belmont No 2 at p 398 in juxtaposition with Belmont at pp 261-262. (4) The underlying rationale of the fraud exception is to avoid the injustice and absurdity of directors or employees relying on their own awareness of their own wrongdoing as a defence to a claim against them by their own corporate employer: Gluckstein v Barnes at pp 247 and 249; Houghton at pp 14 and 19; Belmont at pp 261-262; Beach at para 22.30; Duke at paras 619 to 622; McNicholas at para 56; Morris at para 114; Bilta at paras 36 to 45. (5) The exception applies even if the wrongdoing consists of a transaction formally approved by the whole board of directors, and completed under the company seal: Belmont No 2 at p 398. In other words the exception can apply even when the primary rules of attribution are in play. (6) But the exception does not apply to protect a company where the issue is whether the company is liable to a third party for the dishonest conduct of a director or employee: El Ajou at p 702 (see para 75 above); Meridian at p 511 (see para 79 above); Duke at para 629; Morris at para 114; Bilta at para 34. (7) The supposed distinction between primary and secondary victims, although sometimes a useful analytical tool, is ultimately much less important than the distinction between third party claims against a company for loss to the third party caused by the misconduct of a director or employee, and claims by a company against its director or employee (or an accomplice) for loss to the company caused by the misconduct of that director or employee: Bilta at paras 45 and 77. (8) In cases concerned with insurance the terms of the policy are likely to be decisive, especially where a company has obtained cover against the risk of breach of duty, including fraud, by directors or employees: Arab Bank at p 283, and the comments on that case in Morris at paras 122-124. Internal fraud was the “very thing” from which the insurance cover was intended to protect the company. (9) The fraud exception does not appear to have been even raised as a defence, still less successfully relied on, in a claim by a company against its auditors for failure to detect internal fraud (as in Duke and MAN) with the sole exception of the extreme “one-man” company case of Stone & Rolls (see that case at paras 175 and 176). Again, internal fraud was the “very thing” from which the auditors had a duty to protect the company. (10) Criminal law cases are of little assistance in determining issues of attribution in civil law cases, because of the reluctance of the court, especially in the earlier cases, to treat offences as carrying strict liability: Odyssey at p 64; Tesco is an example, but Tesco No 2 and Safeway show the more modern approach.”
“In the light of Bilta, which goes a long way (but not the whole way) to confirming the views of Professor Watts, the true purpose and limits of the fraud exception have become much clearer. The gradual accretion of learning about primary and secondary victims, with or without additional refinements such as “targeting” or “vehicle of fraud”, can be seen as having missed the point. The crucial distinction depends on the nature of the proceedings in which the issue of attribution arises. On one side there are what Patten LJ (in Bilta, para 34) called the liability cases, such as El Ajou, Meridian, McNicholas and Morris. In them a company is being sued by a third party (which may be an official body) because the company is responsible for dishonest conduct on the part of one or more of its directors or employees. Here the fraud exception does not apply, even if the company is in some sense a victim. On the other side are what may be called the redress cases, such as Gluckstein v Barnes, Belmont, Beach and Bilta itself. In cases of this sort a company is seeking to make its own delinquent director or employee (probably by then an ex-director or ex-employee), or an accomplice of such a person, accountable for the loss that the company has suffered. That is the situation in which the fraud exception applies, because it would be absurd and unjust to permit a fraudulent director or employee to be able to use his own serious breach of duty to his corporate employer as a defence.”
"The elements of the tort of deceit are well known. In essence they require (1) a representation, which is (2) false, (3) dishonestly made, and (4) intended to be relied on and in fact relied on."
“… (2) if the representation is of such a nature that it would be likely to play a part in the decision of a reasonable person to enter into a transaction it will be presumed that it did so unless the representor satisfies the court to the contrary …; … (4) the presumption of inducement is rebutted by the representor showing that the misrepresentation did not play a real and substantial part in the representee's decision to enter into the transaction; the representor does not have to go so far as to show that the misrepresentation played no part at all; …”
“LORD FALCONER: It's right, is it not, that at no stage during the course of the presentation did anybody on behalf of UBS say that this was a risk-free transaction? A. I cannot make a judgment on that. Q. It's right, is it not, that Mr Heininger never told you it was a risk-free transaction at this meeting? A. I can't recall that with any degree of certainty, that the transaction was risk-free. He let me know that, but I'm not sure whether this happened on 9th May.”
“The tranche would be rated AA as rating agencies assess that the probability of incurring 4% or more losses in the portfolio is very low, and commensurate to a AA rating investment.”
“158. There is no dispute that there exists in English law a defence to a claim for equitable relief, such as an injunction, which is based on the concept encapsulated in the equitable maxim 'he who comes into equity must come with clean hands'. Mr Nicholls accepted that the doctrine applies to a claim for an anti-suit injunction where the claim is based on an allegation that the defendant has started proceedings in a foreign jurisdiction in breach of contract because the claimant and defendant had agreed to an exclusive jurisdiction clause in favour of the English courts. It is clear from the speech of Lord Bingham in Donohue v Armco Inc [2002] CLC 440 at [24] that this defence is distinct from that of there being 'strong reason’ not to grant an anti-suit injunction. 159. It was common ground that the scope of the application of the 'unclean hands' doctrine is limited. To paraphrase the words of Lord Chief Baron Eyre in Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318 at 319 the misconduct or impropriety of the claimant must have 'an immediate and necessary relation to the equity sued for'. That limitation has been expressed in different ways over the years in cases and textbooks. Recently in Fiona Trust & Holding Corp v Privalov[2008] EWHC 1748 (Comm) Andrew Smith J noted that there are some authorities in which the court regarded attempts to mislead it as presenting good grounds for refusing equitable relief, not only where the purpose is to create a false case but also where it is to bolster the truth with fabricated evidence. But the cases noted by him were ones where the misconduct was by way of deception in the course of the very litigation directed to securing the equitable relief. Spry: Principles of Equitable Remedies (8th edn, 2010) suggests that it must be shown that the claimant is seeking 'to derive advantage from his dishonest conduct in so direct a manner that it is considered to be unjust to grant him relief'. Ultimately in each case it is a matter of assessment by the judge, who has to examine all the relevant factors in the case before him to see if the misconduct of the claimant is sufficient to warrant a refusal of the relief sought.”
“It is now established that the claim against the briber for damages, which appears in origin to have been a claim for equitable fraud, should be regarded as a claim in damages in tort: see the Mahesan case[1979] AC 374 , 383, per Lord Diplock.”
“Parties to negotiations do not owe each other a duty to act reasonably, but only to act honestly. In the present context, the principal's right is a right to rescind for fraud, not negligence. There is in my judgment a close parallel with the cases on knowing assistance in a breach of trust. The same facts may give rise to different remedies, and as the present case demonstrates it will often be impossible to distinguish between the payment of a bribe or secret commission properly so-called and the diversion of the principal's money into the agent's pocket. There cannot in truth be any real difference between the secret payment to the agent of a sum additional to the purchase price and the payment to him of part of the purchase price of which his principal is unaware.”
“82. In the case of an express statement, ‘the court has to consider what a reasonable person would have understood from the words used in the context in which they were used’: IFE Fund SA v Goldman Sachs International[2007] 1 Lloyd's Rep 264 , per Toulson J at [50] (upheld by the Court of Appeal at[2007] 2 Lloyd's Rep 449 ). The answer to that question may depend on the nature and content of the statement, the context in which it was made, the characteristics of the maker and of the person to whom it was made, and the relationship between them. 83. … In the case of an implied statement, ‘the court has to perform a similar task, except that it has to consider what a reasonable person would have inferred was being implicitly represented by the representor's words and conduct in their context’: ibid. ... 85. The essential question is whether in all the circumstances it has been impliedly represented by the defendant that there exists some state of facts different from the truth. In evaluating the effect of what was said a helpful test is whether a reasonable representee would naturally assume that the true state of facts did not exist and that, had it existed, he would in all the circumstances necessarily have been informed of it: Geest plc v. Fyffes Plc [1999] 1 All ER (Comm) 672, at 683 (per Colman J). … 86. It is also necessary for the statement relied on to have the character of a statement upon which the representee was intended, and was entitled, to rely. In some cases the statement in question may have been accompanied by other statements by way of qualification or explanation which would indicate to a reasonable person that the putative representor was not assuming a responsibility for the accuracy or completeness of the statement or was saying that no reliance can be placed upon it. Thus the representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on. 87. Lastly the claimant must show that he in fact understood the statement in the sense (so far as material) which the court ascribes to it: Arkwright v Newbold(1881) 17 Ch D 301 ; Smith v Chadwick(1884) 9 App Cas 187 ; and that, having that understanding, he relied on it. This may be of particular significance in the case of implied statements.”
“MR LORD: Mr Sanz-Paris, I'm going to ask you first, if I may, about some general banking principles. I wonder if you would agree that one of the fundamental principles of banking is one of integrity, most importantly honest dealing? A. Yes. Q. And that principle will be particularly important, wouldn't it, in a banking context, because there would be a risk, wouldn't there, that otherwise dishonest transactions and actions may take place? A. Yes. Q. And there might be a risk, mightn't there, that people would be tempted to do dishonest things in and about the money involved? A. Yes. Q. And that importance of honesty would apply, wouldn't it, to any counterparty of a bank? A. Yes. Q. And it would apply, wouldn't it, to any intermediary that the bank dealt with or through? A. Yes. Q. And it would also apply, wouldn't it, to the actions of the bank as well? A. Yes. Q. Can I just pose for you a number of hypothetical situations and to get your answer for his Lordship as to what you would do in the circumstances I'm going to posit. Could I start, please, Mr Sanz-Paris, by positing this: that a banker receives a corrupt proposal by an intermediary to fabricate documents to support a managing director of a counterparty of the bank. Can you just assume that for one minute. Do you understand the premise? Do you understand what I'm asking you to assume? A. Yes. Q. That proposal by the intermediary would be a seriously dishonest one, wouldn't it? A. Yes. Q. And if a banker got notice of that seriously dishonest proposal, it would amount to a red flag to any honest banker, wouldn't it? A. Not a red flag. If the banker knew it was a dishonest and corrupt proposal, it's not a red flag, it's a no. Q. So it's a no. So if the banker knows that it's a dishonest and corrupt proposal, and you say ‘it's a no’, can his Lordship take from that that the bank should have nothing more to do with that corrupt intermediary? A. If the banker knew to be corrupt, yes. Q. If the bank was on notice of a dishonest proposal by an intermediary, that would be a no in the sense that the bank should immediately cease to deal with that intermediary, shouldn't it? A. One assumption is the banker understood and knew that proposal to be dishonest. Q. Yes. A. Yes. Q. But if you assume the banker knows it to be a dishonest proposal, the bank should immediately cease to deal with that intermediary, shouldn't it? A. Yes.”
“Q (by Mr Railton). And it's particularly bad, isn't it, because it's not just brazen dishonesty by Value Partners and Mr Heininger, but they are actually teaming up to try to deceive KWL who they are meant to be working for. A. Yes. Q. It's simply outrageous, isn't it, Mr Sanz-Paris? A. Yes. … Q. And it's quite obvious, isn't it, that if Mr Bracy had reported this up the chain within UBS, either to Mr Czekalowski, CRC, Compliance, or whoever the right people were to report it to, UBS would have had nothing more to do with Value Partners or Mr Heininger, would they? A. I think that is correct. Q. It simply wouldn't deal, would it, with people who behave dishonestly in that way? A. Yes. Q. And if that had happened, of course the intermediation exercise that we were talking about yesterday would be dead before Depfa was even approached? A. Yes. Q. And you would certainly never have written to Depfa in the terms you did, which we were looking at yesterday. Perhaps I can just show you again. [Reference was made to an email in which Mr Sanz-Paris confirmed that UBS had done its own due diligence on KWL and said that Depfa must do the same]. You remember that email? In the middle of the page, you talk about the due diligence that you've done on KWL, the deal, to which Mr Selim adds at the top of the page saying that you've also done due diligence on Value Partners. You never would have written in those terms to Depfa. A. That is correct. Q. And you wouldn't have done so, because if UBS had known about Value Partners and Mr Heininger's dishonesty, it would be fundamentally misleading to present this deal to Depfa without telling them about it? A. That is correct. Q. And I think you would agree that honesty and integrity is a fundamental in the banking world? A. In all walks of life, but in banking especially, yes. Q. And anyone to whom the deal is presented could take it as read that UBS don't know Value Partners and Mr Heininger to be dishonest? A. Could you repeat the question, please? Q. Yes. Anyone to whom this deal was presented could just take it as read, the fact -- could assume from the fact -- sorry about the use of the language – but anyone to whom the deal is presented could assume from the fact that it has been presented by UBS, that UBS don't know Value Partners and Mr Heininger to be dishonest? A. That is correct, yes. Q. It's obvious, isn't it? In a sense I'm sorry to ask you this question because it is so obvious. A. Okay. Q. But it's obvious, isn't it, that no reputable bank who knew of Value Partners' and Mr Heininger's dishonesty would proceed with this transaction? A. That is correct. Q. I think, as you put it eloquently last Friday in answer to some questions from Mr Lord, you said: it's not just a red flag, it's a no, isn't it? A. That is correct, yes.”
“Q (by Mr Railton). You recall I've just been through four instances that are relied on in some respects by KWL: bribe; conflict of interest; misrepresentation; lack of authority? A. Yes. Q. And the reason why you wouldn't proceed in those circumstances, I would suggest, is that UBS would not want to do business which had such problems buried within it. A. I think that's the right assumption, yes. Q. And you certainly wouldn't present it as a business opportunity to Depfa if you had those problems in the transaction? A. I agree. I mean, UBS would not do a transaction, I would not present a transaction I was not comfortable with, yes. Q. And if you did present it to Depfa, you would make sure that you would tell them what the problems were? A. Well, if there were problems, I don't think we would present it altogether. Q. No, I understand. And of course, from Depfa's point of view, they could rightly assume, couldn't they, that when UBS invites them in to intermediate, that you don't know that there are problems of that nature that we have been through with the transaction? A. That is correct. Q. And indeed, they could rightly assume, couldn't they, that it's a genuine and proper business opportunity that you're inviting them to participate in? A. Yes. Q. And that's simply because no reputable bank would try to sign up a third party to a transaction that it knew was flawed in that sort of way? A. Yes.”
“Q (by Lord Falconer). Thirdly, they had told you that they had done due diligence on KWL? A. Right, yes. Q. But that you, Depfa, had to do your own due diligence on KWL? A. Yes. Q. That you couldn't, therefore, rely on the due diligence done by UBS on KWL? A. Yes. Q. And it would be up to you as to what you did in relation to Value Partners, but again you couldn't rely on any due diligence done by UBS on them? A. Yes, and my understanding here was that UBS did not want to us to be making decisions based on work that they had done and then going back to them at a later stage saying we relied on your internal credit work or due diligence work, so now it is your fault. So they were -- yes, they didn't want us to have that risk.”
“However, to render the principal liable in an action of deceit in such a case, it must it seems be proved that there was a fraudulent state of mind on his part: that is, that he intended the claimant to be misled or at the very least was indifferent as to whether he might be. Where a false representation has been made innocently by an agent acting within his authority, the mere fact that the principal knows the facts which render the representation false will not make the latter liable if he has not expressly authorised the representation or deliberately concealed facts from the agent with a view to the claimant being misled. So in Armstrong v Strain[1952] 1 KB 232 estate agents with general authority to make representations about a house on their books innocently told a purchaser that it was sound when, as the owner knew, it was not. The Court of Appeal upheld a finding that the owner was not liable to the purchaser in deceit.”
“(a) The principal is liable if he authorised the agent to make the false representation which he (the principal) knew to be untrue (or did not believe to be true), whether or not the agent knew the truth. (b) The principal is liable if, while not expressly authorising the agent to make the false representation, he knew it to be untrue and was guilty of some positive wrongful conduct, as by consciously permitting the agent to remain ignorant of the true facts, so as to prevent the disclosure of the truth to the third party, if the third party should ask the agent for information, or in the hope that the agent would make some false representation. The agent's representation when made would of course require to be within the scope of his actual or apparent authority.”
“if one agent makes a statement honestly believing it to be true, but another agent or the principal himself knows that it is not true, knows that the statement will be or has been made, and deliberately abstains from intervening, the principal will be liable. In these circumstances the party with the guilty knowledge can himself be treated as being guilty of fraud.”
“A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called 'the rules of attribution.' The company's primary rules of attribution will generally be found in its constitution, typically the articles of association, and will say things such as …'the decisions of the board in managing the company's business shall be the decisions of the company.' These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company, and having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort. The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations.”
“The law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquires while acting within the scope of his authority.”
“The ordinary rules of attribution are well-known. In general, an employer is deemed to have notice of anything of which any of his employees obtains knowledge in the course of his employment. Likewise a company is in general deemed to have notice of anything of which any of its directors obtains knowledge in the course of his duties.”
“Terry, the firm successfully closed a two part transaction for KWL, a German utility in 2006. The total revenue generated by the firm is as follows. Approximately$26 million was booked by the Fixed Income Structured and Exotic trading desk. In addition, UBS Asset Management was appointed as the asset manager to KWL. Their approximate revenue realization was$6 million . As you know, this transaction was originated by and brought into the firm by me utilizing as advisors Value Partners who were former colleagues of mine at CSFB. We collectively worked on the original transaction for KWL. FYI-for 2007 we are mandated for the City of Zurich to do a lease restructuring that should close in the first quarter. The revenue expectation for the firm is approximately$35 million which would be booked by the Fixed Income Structured and Exotic trading desk. We also are very far along with other opportunities that we expect will close in 2007 in the United States and Europe as well. We have another piece of KWL to do in 2007 and several strong restructuring candidates in the US.”
“Non-Reliance. Each party is acting for its own account, and has made its own independent decisions to enter into this Transaction and that the Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. Each party is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into this Transaction; it being understood this information and explanation relating to the terms and conditions of this Transaction shall not be considered investment advice or a recommendation to enter into this Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of this Transaction.”
“(a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud.”
“81. In these circumstances, I would be inclined, subject to authority, to regard cl 24 as being concerned only with matters of agreement, and not with misrepresentation at all. The essence of agreement is that it is concerned with matters which the parties have agreed. The essence of misrepresentation, however, is that it is not concerned with what the parties have agreed, but rather with inaccurate statements (innocently, negligently or fraudulently inaccurate statements) which have been made by one party to the other, have been relied on by the representee in entering into their agreement, and which may give the representee rights to rescind that agreement and/or claim tortious or quasi-tortious damages by reason of loss arising out of entering into the agreement.”
“94. In my judgment, this jurisprudence confirms my provisional conclusion on the wording of cl 24. No doubt all such cases are only authority for each clause’s particular wording: nevertheless it seems to me that there are certain themes which deserve recognition. Among them is that the exclusion of liability for misrepresentation has to be clearly stated. It can be done by clauses which state the parties’ agreement that there have been no representations made; or that there has been no reliance on any representations; or by an express exclusion of liability for misrepresentation. However, save in such contexts, and particularly where the word ‘representations’ takes its place alongside other words expressive of contractual obligation, talk of the parties’ contract superseding such prior agreement will not by itself absolve a party of misrepresentation where its ingredients can be proved.”
“Non-reliance. We are acting for our own account and have made our own independent decisions to enter into this letter and purchase the Notes and as to whether the Note purchase is appropriate or proper for us based upon our own judgment and upon advice from such advisors as we deem necessary. We are not relying on any communication (written or oral) from you as investment advice or as a recommendation to enter into this letter or to purchase the Notes, it being understood that information and explanations related to the terms and conditions of the Notes shall not be considered investment advice or a recommendation to purchase the Notes. No communication (written or oral) received from you shall be deemed to be an assurance or guarantee as to the expected results of the purchase of the Notes.”
“513. I agree with CRSM that the clause, construed as a whole, is focussing on investment advice and recommendations. It is in this context that the independent decision making referred to in the first sentence falls to be considered. It means independent of any advice or recommendations provided by Barclays. It does not expressly, necessarily or clearly go beyond that. It does not therefore, contrary to Barclays' submission, apply to 'anything which Barclays may have said or omitted to say about the Notes'. 514. The second sentence precludes reliance upon communications as being investment advice or recommendations. In so far as the alleged representations are sought to be so relied upon I agree with Barclays that it has been contractually agreed that they may not be. In such a case CRSM would be contractually estopped from contending that actionable representations had been made thereby, whether under s.2(1) of the [Misrepresentation] Act or for negligent misstatement. 515. Whether or not the communications are being relied upon as advice or recommendations depends upon the substance of the claim made. On the basis of the misrepresentation case as advanced in closing I would not characterise any of the representations alleged as constituting investment advice or recommendations or as them being so relied upon.”
“The occurrence of an early termination in respect of the Portfolio Swap shall constitute an Additional Termination Event, in respect of which (i) both parties shall be Affected Parties; (ii) this Transaction shall be the sole Affected Transaction; (iii) the early termination date in respect of the Portfolio Swap will be deemed to be the Early Termination Date designated as a result of this Additional Termination Event; and (iv) for purposes of Section 6(e) of the Agreement (A) where an amount is paid by Counterparty to Kommunale Wasserwerke Leipzig GmbH under the Portfolio Swap, an amount shall be payable by UBS to Counterparty under this Transaction equal to that amount and (B) where an amount is paid to Counterparty under the Portfolio Swap, an amount shall be payable by Counterparty to UBS under this Transaction, equal to that amount.”
“Floating Payment Floating Amount: The Counterparty shall pay to UBS, on each Portfolio Swaps Floating Payment Date the related Equivalent Portfolio Swaps Floating Amounts.”
“The party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention.”
“It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: K. Lokumal & Sons (London) Ltd. v Lotte Shipping Co Pte Ltd. [1985] 2 Lloyd's Rep. 28; Norwegian American Cruises A/S v Paul Mundy Ltd [1988] 2 Lloyd's Rep. 343; Treitel, The Law of Contract, 9th ed. (1995), pp. 112-113. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention.”
“Q (by Mr Salzedo). But do you accept, given the comparison between static and managed, that your management of these portfolios after they were selected has turned out to be disastrous for KWL? A. In hindsight, yes. I fully appreciate that my management wasn't great.”
“The Investor hereby appoints the Portfolio Manager to act as the agent of the Investor in connection with the Portfolio and the Portfolio Manager agrees to act as the agent of the Investor and, on behalf of the Investor, subject to and in accordance with the provisions of this Agreement: (i) to act as discretionary manager of the Portfolio and in connection therewith to make Adjustments and otherwise act as the Portfolio Manager judges appropriate in relation to the management of the Portfolio; and (ii) to do such other things in connection with the Portfolio required pursuant to this Agreement.” (i) to act as discretionary manager of the Portfolio and in connection therewith to make Adjustments and otherwise act as the Portfolio Manager judges appropriate in relation to the management of the Portfolio; and (ii) to do such other things in connection with the Portfolio required pursuant to this Agreement.”
“Selection philosophy • UBS Global AM integrated research to identify credits -- UBS Global AM credit analysis integrated with UBS Global AM equity research • Avoidance of companies with -- poor transparency or accounting -- rapidly changing fundamentals -- outlier spreads • Exposure to low-risk HY [High Yield] companies rather than high-risk IG [Investment Grade] companies • Maximise diversification, minimise risk concentration: no big bets Monitoring philosophy • Continuous surveillance to identify potential problem credits early (e.g. WorldCom, Enron, Parmalat, Delphi) • Early exit strategy for problem credits Execution philosophy • Integration of UBS Global AM functions for execution decisions -- portfolio managers, research analysts, traders” • UBS Global AM integrated research to identify credits -- UBS Global AM credit analysis integrated with UBS Global AM equity research • Avoidance of companies with -- poor transparency or accounting -- rapidly changing fundamentals -- outlier spreads • Exposure to low-risk HY [High Yield] companies rather than high-risk IG [Investment Grade] companies • Maximise diversification, minimise risk concentration: no big bets Monitoring philosophy • Continuous surveillance to identify potential problem credits early (e.g. WorldCom, Enron, Parmalat, Delphi) • Early exit strategy for problem credits Execution philosophy • Integration of UBS Global AM functions for execution decisions -- portfolio managers, research analysts, traders”
“Q (by Mr Salzedo). You are aware, I think, that there have been expert reports about your management of these portfolios? A. I am. Q. I'm not going to take you through them, but I want to show you eight lines in one of the reports, if I may, which summarise things. Can I do that, please. It's the second report of Mr Hale at bundle {D2.1/5/205}. I just want to show you paragraph 28. Mr Hale says this: ‘The explanation for the substantially higher default rates in the UBS GAM portfolios compared to the investment grade universe is that the approach adopted by UBS GAM was not a diversification strategy. Essentially, UBS GAM took a concentrated bet on financials, bond insurers, risky consumer lenders, and banks that were known to have high -- and rising -- levels of leverage before the credit crisis struck. These sectors were all highly correlated with each other. By July 2008 exposure to these sectors had been ramped up to above 40 per cent in all three portfolios. The subsequent defaults as the crisis intensified came from within these sectors and the very high overlap between the portfolios meant that total loss was suffered (or virtually total loss priced in via unwind) across all four STCDOs.’ That's absolutely right, isn't it? A. That's factually correct, yes.” ‘The explanation for the substantially higher default rates in the UBS GAM portfolios compared to the investment grade universe is that the approach adopted by UBS GAM was not a diversification strategy. Essentially, UBS GAM took a concentrated bet on financials, bond insurers, risky consumer lenders, and banks that were known to have high -- and rising -- levels of leverage before the credit crisis struck. These sectors were all highly correlated with each other. By July 2008 exposure to these sectors had been ramped up to above 40 per cent in all three portfolios. The subsequent defaults as the crisis intensified came from within these sectors and the very high overlap between the portfolios meant that total loss was suffered (or virtually total loss priced in via unwind) across all four STCDOs.’ A. That's factually correct, yes.”
“MR SALZEDO: Do you recall, Mr Powell, that Mr Dattani's view was that in hindsight, he had made two mistakes. First, believing that financials, including US, Iceland and Kazakhstan would be bailed out by sovereigns, and second, believing that monolines would be bought out if they got into difficulties? A. Yes. Q. Do you recall that? A. Yes. … Q. A portfolio manager meeting the relevant standard would try not to rest too much risk on too few of these kind of future judgments, wouldn't they? Do you agree with that? A. I think it depends on what probability they place on those judgements in terms of the risks that were occurring. Q. Yes. You obviously have to weigh up how extreme you think a risk is with how much money effectively you place on that risk not eventuating, don't you? A. Yes. Q. To the extent that you recognise risks as significant, you will minimise the amount that you focus on each of those risks if you can? A. One would risk budget, yes. You would look at the different risks, put probabilities associated with them and try and build a portfolio around that analysis. Q. And that's especially important, isn't it, if your client has got a single tranche, a mezzanine single tranche, very important that you don't place too much on a few risks? A. Depends -- to some extent, yes. It depends on how extreme a probability you're putting on particular events occurring. Certainly at the time these portfolios were put together, there was no -- or very little -- very few people believed that we were going to have the level of financial crisis that we did, and the spreads of these names reflected there. Q. But of course, the voices fearing that the kind of crisis that was coming, might be emerging, got louder throughout the period after these portfolios were put together, didn't they? A. Yes. Q. We certainly know in hindsight that Mr Dattani did stake too much on his opinion on those two matters turning out to be right, don't we? A. Yes. Q. And what I suggest to you is that although hindsight is relevant to whether they turned out to be wrong, actually even without hindsight, it is clear that Mr Dattani increased and maintained a position depending on a very few of these judgments for far too long as the crisis developed, didn't he? A. Yes, that is correct. And one of the issues that I wrestled with is at what point should he have been making the move away from that. Q. Yes. A. And the nature of an STCDO and the nature of the hurdle MM is such that there comes a point in time where you are straitjacketed to the point that making certain moves becomes very difficult.”
“Q (by Mr Salzedo). Do you accept that your primary and most important role as manager was to take all the steps you could to minimise the risk of default hitting KWL's tranches? A. I think if that were the case, they would have gone for a static pool. Q. So you do not accept that that was your role? A. I do not, because the rating was important.”
“MR JUSTICE MALES: Sorry, to interrupt, but can I just make sure I've understood how this transaction worked, because if I haven't, then you can correct me sooner rather than later. As a result of these transactions being put in place, we know that KWL gets a premium, which I think is something you're not directly concerned with. But anyway, that's a sum of money that they get upfront right at the beginning, yes? A. (Nods) MR JUSTICE MALES: Now, they're never going to get anything more than that out of it, are they? Your portfolio management is not going to result in further payments to KWL because you do a particularly good job, is that right? A. The way the PMAs were drafted, that would be the only money they get. MR JUSTICE MALES: Exactly. So they get their premium up front, and that's all they're ever going to get? A. Correct. MR JUSTICE MALES: And then the only downside they have from the transaction is if there are sufficient defaults that their attachment point is reached? A. That is correct. MR JUSTICE MALES: So the only thing that matters to KWL on the economics of this transaction, is if there are defaults, is that right? A. It does, but you wouldn't get a tranche rated if you didn't want a PM [portfolio manager] to maintain the rating. There would be no point, because the Moody's and S&P restrictions that is put on to a PM are prohibitive, very prohibitive. They don't allow you to do certain things; you can do other things. But if KWL's intention upfront was to just get their money up front and have no -- nothing to pay for at the end, then they would have had an unrated tranche. MR JUSTICE MALES: But the rating is only significant, isn't it, because it tells you that a default may be coming? If the rating is downgraded, that's a warning sign that there might be a default. It's not significant in itself, or for any other reason, is it? A. It is in that, as I explained a few minutes ago, my Lord, if you take a static pool -- regardless of who selects it -- of credits, five years from now that static pool will worsen. So effectively, you hire a PM to make sure that the rating factor of the portfolio remains constant. There would be no other reason to have a PM.”
“MR SALZEDO: You didn't really here, did you, pay enough attention to catching those falling names as they started falling? A . Obviously history shows that you're right.”
“Minutes contain insufficient detail to evidence regular monitoring over credit risks and the rationale for CDS substitution decisions taken. Explicit approval by the CDO Investment Committee of the CDS portfolios for CDOs launched subsequent to Empyrean, and CDS substitutions on all portfolios, are not documented and do not provide evidence that sufficient review and analysis was performed to assess the quality of CDS names bought and sold.”
“In the event of litigation, there may be insufficient evidence to support investment substitution decisions and that regular monitoring over credit risks was being performed.”
“Minutes should evidence the review of available research reports, as well as document the investment rationale and approval of new investments or substitutions. Ongoing monitoring should be demonstrable. The Portfolio Manager should consider taking notes to evidence his review of the daily reports produced by the Portfolio Management Tool or alternatively sign off these reports and keep them in a file.”
“Any portfolio manager that makes a mistake in a client account, the client inevitably ends up paying for it.”
“Q (by Mr Salzedo). Going back to the Kazakh banks, a point you don't mention in the witness statement is that on1st November 2007 , Moody's downgraded the Kazakh banks; are you aware of that? A. Yes. Q. You are? A. Yes. Q. That was only a belated recognition, wasn't it, of what the market spreads had been saying to anybody who listened to them? A. Yes. Q. And a prudent portfolio manager, pursuing the strategy I've already referred to, would certainly have eliminated, or at the very least reduced these banks from his portfolios after the downgrade, if they hadn't done so before? A. A prudent portfolio manager would trust his gut instinct, which is: is he convinced these names are going to default? And I was not convinced these names were going to default. Q. I see that, Mr Dattani. That's quite an important aspect, I think, isn't it, of your approach to this? Your view was that it was for you as the manager to form a gut instinct, and if you were convinced that a name was going to default, obviously you would have to remove it. But if you were not convinced it was going to default, your view was you should carry on with the optimisation, the ongoing optimisation process that we discussed yesterday? A. I think sometimes when you know that a name is going to default, you still might choose not to remove it, because the cost of actually removing it is tantamount to actually having a default and recovery. Q. Okay, I understand. But certainly you wouldn't remove it at anything short of being convinced of a default, and you might not even then? A. No, I think, at the end of the day, you would kind of like see -- okay, if a name was trading at 100 and you think it was going to default, the cost of removing it is low. If the name is trading at 1,000, the cost is pretty high. So you would have to look at what the cost benefit is for the client. If I thought the name was going to default, which I didn't in these cases. Q. So the threshold for you to consider removing a name, apart from in a metric improving trade, is that you are convinced that it's going to default, then you would consider whether to remove it? A. Yes, once it migrates into non-investment grade, you've actually -- you've already -- you're in a straight jacket, because it's already high yield. Q. Yeah. It's that danger, isn't it, that is why the pitch book tells clients that you'll have an early exit strategy like the one that was apparently followed for Parmalat many years ago? That's why the early exit strategy is sold to clients as what you're going to do, isn't it? A. I think in CDOs, the early exit strategy is what cash portfolio managers do. In CDOs, you are actually a little bit constrained, because you have too many moving parts. You can't hold cash, for example, you can only own an asset. And you're always fully invested. A cash portfolio, they do not have these constraints. Q. I see. So your view is that you couldn't really follow the policy which had been set out – A. No, that's not my view, sir. My view, my Lord, is very simple. There comes a point in time if you haven't replaced a name, which is, shall we say, risky, it is possibly too late. So if something is going to migrate from investment grade to high yield, and you haven't picked it up at investment grade, by the time it migrates to high yield, it is too late, because it has already widened. So there you make a slightly different -- I wouldn't call it a "bet", but a choice: is the name a default risk? If it is, then obviously you need to still think about removing it, and if you come to the conclusion that it is default risk, you need to look at where it's trading. And if it's trading very wide, you need to look at what the recovery would be. So there are a series of decisions which are needed to be made in a CDO portfolio which are not required for a cash portfolio. MR JUSTICE MALES: But isn't the approach that you describe, which is that you, as a prudent manager, if it's still investment grade, you don't need to remove it, and you only start to think about that when you form the view that it's likely to default; if you have formed that view, then isn't it likely that others in the market will have done so as well, and that the spread will have widened, and your approach means that it will, if not always, then very often be too late to remove it, because it will be too expensive to do so? A. I -- I mean, hypothetically the example you gave, the only thing I would change is you need to -- if you catch a falling name -- and I mean falling in rating -- at the investment grade level, it's obviously not going to cost you very much. But if it migrates to a high yield and then into default, you are -- in a CDO portfolio like this, you are almost certainly likely to just hold it and take the default. CDO portfolios effectively have higher defaults, purely because there are certain trades you cannot do that you would do in a cash portfolio. MR SALZEDO: You didn't really here, did you, pay enough attention to catching those falling names as they started falling? A. Obviously history shows that you're right.”
“MR JUSTICE MALES: You say in [paragraph] 163 [of his witness statement]: ‘I was not concerned about the Icelandic banks defaulting.’ Does the fact that you started looking at exiting indicate that in fact you did have some concern? A. Okay, both those things can actually be true, my Lord, because I don't know at what time I looked at the Icelandic exits. It could have been May [2008], and I'm talking about January here. MR JUSTICE MALES: Right, but consistent with the approach you described earlier, you would only look at exiting once you became concerned about the possibility of a default; is that a correct understanding? A. That would be correct, yes.”