By Karen Freifeld and Jonathan Stempel
NEWYORK (Reuters) – The U.S. government on Thursday filed a civil fraud lawsuit accusing UBS Group AG <UBSG.S>, Switzerland’s largest bank, of defrauding investors in its sale of residential mortgage-backed securities leading up to the 2008-09 global financial crisis.
UBS was accused of misleading investors about the quality of more than $41 billion of subprime and other risky mortgage loans backing 40 securities offerings in 2006 and 2007, the Department of Justice said in a complaint filed with the federal court in Brooklyn.
The lawsuit came after UBS rejected a government proposal that it pay nearly $2 billion to settle, according to a person familiar with the talks who was not authorized to speak publicly about them.
While UBS was not a big originator of U.S. residential home loans, U.S. Attorney Richard Donoghue in Brooklyn said investors suffered “catastrophic losses” from the bank’s failure to fully disclose the risks of mortgage securities it helped sell.
A UBS spokesman and a Justice Department spokeswoman declined to comment on the settlement talks, but the bank said it will fight the lawsuit.
“The DOJ’s claims are not supported by the facts or the law,” it said in a statement. “UBS is confident in its legal position and has been fully prepared for some time to defend itself in court.”
U.S. officials are seeking unspecified fines against UBS under a federal law allowing it to pursue penalties up to the amounts the bank gained or others lost from alleged misconduct.
The case is one of the last addressing alleged misconduct in the pooling and sale by large banks of mortgage securities that were a major cause of the financial crisis.
Bank of America Corp <BAC.N>, Barclays Plc <BARC.L>, Citigroup Inc <C.N>, Credit Suisse Group AG <CSGN.S>, Deutsche Bank AG <DBKGn.DE>, Goldman Sachs Group Inc <GS.N>, HSBC Holdings Plc <HSBA.L>, JPMorgan Chase & Co <JPM.N>, Morgan Stanley <MS.N> and Royal Bank of Scotland Group Plc <RBS.L> previously settled.
‘LYING IS OK’
U.S. officials faulted UBS for having a business culture that placed a higher priority on profits than full disclosure to investors, who were deprived of crucial information about the quality of the loans underlying the securities they bought.
Thursday’s lawsuit quoted a UBS trader who in a 2006 instant message said “our crack due diligence effort is a joke,” and a UBS mortgage employee who the same year complained to his bosses about the bank’s ethics, including that “Lying is ok.”
Like UBS, Barclays had also resisted settling prior to being sued by the Justice Department. That case ended in March with a $2 billion settlement.
UBS was among the banks hardest hit in the financial crisis, and has said it lost more than $45 billion after the U.S. housing market collapsed.
It was not immediately clear how much UBS has set aside for the U.S. case, though analysts said it might be more than half the 1.2 billion Swiss francs ($1.20 billion) it has reserved for so-called non-core legal risks.
UBS is also fighting charges by investigators in France that it helped wealthy clients avoid taxes in that country, and turned down a 1.1 billion euro ($1.25 billion) settlement offer, judicial sources have said.
Shares of UBS closed up 1.3 percent in European trading earlier on Thursday. The U.S. lawsuit was made public after markets closed in that country.
The case is U.S. v UBS Securities LLC et al, U.S. District Court, Eastern District of New York, No. 18-06369.
(Additional reporting by Angelika Gruber and Michael Shields in Zurich; editing by Jane Merriman and Dan Grebler)