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The news of a “rogue trader” losing $2.3 billion from the vaults of UBS AG last month translates into exciting headlines, steeped in international intrigue. But for institutional investors in the Swiss bank, this stream of negative stories is likely to make them want to reach out to a lawyer. “When something like UBS comes up, the news flow is just so intense that it’s going to pop into my clients’ radar,” says Dominic Auld, of counsel for Labaton Sucharow LLP, who specializes in securities class action litigation. “They want us to handicap it: what’s it all about?” In considering possible legal action against the bank, the problem for investors is not only the $2.3 billion trading loss itself, but the 11 percent drop in the bank’s stock the day that loss was announced—amounting to a roughly $5 billion exposure for shareholders. In essence, says Auld, investors want to know if there exist facts of bank misconduct strong enough to file a lawsuit, and whether filing suit is likely to lead to a meaningful recovery of their losses. While it’s still early days for the UBS scandal, the bank’s chief executive, Oswald Gruebel, has already departed in its wake. Gruebel came out of retirement in 2009 to right the Swiss institution’s fiscal ship after its enormous losses from the 2008 financial crisis—for which the bank received an unprecedented bailout from Switzerland’s government. When Gruebel took over, the bank was also facing a lawsuit from the Internal Revenue Service that included accusations of tax evasion by U.S. citizens. Now, UBS is under pressure to release the results of an internal investigation into the so-called “rogue trading” incident, reports London’s City A.M. British and Swiss regulatory authorities are also investigating the circumstances that have so far led to the arrest of 31-year-old Kweku Adoboli, a trader in UBS’s London office. “I’m pretty confident that we’re going to see a UBS case filed” as the facts come together, says Auld. There are three components of potential litigation that Auld and his colleague are analyzing. The first line of inquiry boils down to determining: Is this trader actually a rogue? “Rogue” is a label the bank is using to signify that the trader was doing something unauthorized. But that’s not necessarily the case. In other words, explains Auld, the big question is whether or not the trader’s actions fall “outside of the allowable risk parameters set up that govern his area, his position, his role.” “If they are then I think, yeah, the bank’s right, he’s a rogue,” says Auld. “If he’s operating closer to the edge, in a grayer area, or if he’s operating clearly on the inside of their allowable risk profiles, then the bank has a problem.” Next, regardless of whether or not the trader was a rogue, the question, says Auld, is: “Does UBS have a control problem?” “As an investor,” he says, “I’d want to know: What kind of system do you have in place to prevent individual traders on single desks to expose you to such a huge number on the downside that it wipes out your entire third quarter’s profits?” Here, UBS’s recent track record on risk management comes to bear. Investors buy securities based on public information and what the company says to the market. Since Gruebel came aboard, “the bank has been saying, We’re serious about risk, we’re serious about righting the ship,” says Auld. But the news of the rogue trading prompts investors to wonder: “Was management really being honest?” Finally, the third issue is to what extent investors will be able to recover losses by filing suit. Because UBS is not a U.S. bank, investor recovery will likely be limited to its stock that is traded in the U.S. About 15 percent of the bank’s volume trades in New York, but the majority of investors will have to turn to the Swiss legal system. Auld says that is “problematic” for investors, because, unlike the U.S., Switzerland does not have decades’ worth of jurisprudence and case law on securities. “It’s a very well-established, mature system here,” says Auld, but that is not the case in Switzerland. As the saga continues, there can be little doubt that any and every revelation will carve out a path that leads to a conclusion for investors—and regardless of what that conclusion is, it’s likely to have a litigious component. Says Auld: “Major investors took a beating on their securities purchases and they want to know what to do.” See also: “UBS’s $2 Billion ‘Rogue Trader’ Exposes Risk Management Failures,” CorpCounsel, September 2011.

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