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C.D.T.S. No. 1 & A.T.U. Local 1321 Pension Plan v. UBS AG

United States District Court, Second Circuit

December 13, 2013

C.D.T.S. NO. 1 & A.T.U. LOCAL 1321 PENSION PLAN, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
UBS AG, et a Defendants.



Over the past several years, it has been ever so easy to make banks the target of lawsuits alleging securities fraud: what banks said, how those statements failed to match up to what happened, and who did or should have known. One might think of the tired but appropriate phrase "shooting fish in a barrel." But the securities laws have limits; and it is the responsibility of the courts to ensure that those limits are enforced, and that lawsuits which cannot withstand the most basic scrutiny find their way into whatever great beyond awaits suits dismissed for failure to state a claim.

The securities laws do not, for instance, require that banks be prescient or omniscient; they do require, inter alia, that a company and officers or directors accused of fraud have the requisite state of mind; they do require that the maker of statements alleged to be false knew of the falsity at the time.

This is a lawsuit which essentially asserts that statements regarding risk controls must have been false because they occurred while a rogue trader racked up a massive loss; this lawsuit fails to meet the basic requirements for stating a claim. This case is, therefore, dismissed.[1]


In the context of a motion to dismiss, this Court accepts as true all well-pled factual allegations.

UBS AG CUBS"), and Oswald J. Grübel (CEO of UBS from February 26, 2009 to September 24, 2011), John Cryan (CFO of UBS from September 2008 until May 31, 2011; also Chairman and CEO of UBS London Brand and UBS Limited from November 2010 through May 31, 2011), Philip J. Lofts (the Chief Risk Officer Of UBS from November 2008 through December 31, 2010), and Carsten Kengeter (the co-CEO of UBS Investment Bank from April 27, 2009 until November 1, 2010, when he became the sole head of the Investment Bank) (referred to together as the "Individual Defendants"), are alleged to have violated the Securities and Exchange Act of 1934 during the period from November 17, 2009 through September 15, 2011. (Am. Compl. ¶¶ 2, 12-15, March 4, 2013, ECF No. 46.)

Plaintiffs' assertions of fraud are based on a series of alleged material misstatements and omissions "regarding UBS's purportedly robust risk management systems and internal controls." (Id. ¶ 4.) Plaintiffs have selected a number of statements which, in various ways, describe UBS as taking a "more cautious approach" to trading and risk management and as having effective controls in place. (Id.)

For instance, plaintiffs assert that on November 17, 2009, the first day of the class period, defendants "began a campaign to highlight [their] purportedly disciplined and effective risk management and control systems"..." (Id. ¶ 25.) For example, Lofts allegedly stated "that one of the key messages' investors should take away from a presentation" at UBS's Investor Day in Zurich, Switzerland was "that we have made significant improvements in the way in which we measure and manage risk care at UBS. We have instilled a new risk culture at the firm." (Id. ¶ 25.) Lofts is also alleged to have said that "there is robust supervision of trade capture and valuation" and that "the nature and size of the risk that we take is one of the core discussion topics among senior management." (Id. 26.)

Additional alleged misstatements include that "there is a new risk culture at the bank" (id. ¶ 27)[2] and "we... have a controlled and disciplined risk culture" (id. ¶ 28).[3] On other occasions, Grübel stated that "we have weekly risk calls... where we go through our risk position in the old bank weekly...." (Id. ¶ 29.) In its 2009 Annual Report, signed by Grübel, and reviewed by Cryan, Lofts and Kengeter, UBS states: "Our operational risk management and control systems and processes are designed to help ensure that the risks associated with our activities are appropriately controlled." (Id. ¶ 35.) In other filings with the Securities and Exchange Commission, management reported that UBS's internal control over financial reporting was effective. (Id. 36.) In November 2010, the Individual Defendants spoke at an investor conference. Lofts stated that "senior management are aware of all material risks" and Kengeter stated "[e]verything we do is tied to risk management." (Id. ¶¶ 45-46.)

Plaintiffs allege that these statements are appropriately contrasted with, inter alia, defendants' failure to integrate risk assessment into UBS's compensation framework (id. ¶ 56(a)), [4] incentivized high risk trading (id. 56(b)), had insufficient risk controls in various areas (id. ¶ 56(c)-(j)), permitted individual traders to maintain "umbrella" or "suspense" accounts (id. ¶ 56(k)), [5] and failed to robustly supervise risk (id. ¶ 56(n)).[6]

According to plaintiffs, the falsity of these statements was revealed on September 15, 2011, when UBS disclosed that a "rogue' trader in the Investment Bank division had engaged in unhedged proprietary trades with non-existent counterparties that exposed [UBS] to losses that ultimately exceeded $2.3 billion." (Id. ¶ 5.)[7] Plaintiffs contend that this incident "forced to disclose that UBS's risk and disclosure controls were inadequate and that unauthorized trading in excess of risk limits in its Investment Bank" had occurred. (Id. ¶ 64.)

Finally, plaintiffs point to a series of media reports, investigations, admissions, and settlements relating to this trading incident to illustrate the purportedly inadequate controls that UBS had in place. (Id. ¶¶ 65-74.) On October 5, 2011, UBS's interim CEO Sergio Ermotti[8] stated in an internal memo:

In no circumstances should something like this ever occur. The fact that it did is evidence of a failure to exercise appropriate controls. Our internal investigation indicates that risks and operational systems did detect unauthorized or unexplained activity but this was not sufficiently investigated nor was appropriate action taken to ensure existing controls were enforced.

(Id. ¶ 74; see also id. ¶¶ 75-79.)


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