Business Context and Reporting Period
This Form 6-K filing by UBS Group AG and UBS AG, dated November 9, 2018, reports a significant legal development. The United States Department of Justice (DOJ) filed a civil complaint in the U.S. District Court for the Eastern District of New York regarding UBS's issuance, underwriting, and sale of residential mortgage-backed securities (RMBS) from 2006 and 2007. The complaint seeks unspecified monetary civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).
Key Financial Metrics and Legal Exposure
The filing does not provide current period revenue, profit, cash flow, or liquidity metrics. However, it discloses historical financial data relevant to the legal defense:
- Total U.S. Mortgage Investment: UBS invested USD 100 billion in U.S. residential mortgage-related assets.
- Total Losses: UBS lost more than USD 45 billion when the housing market collapsed.
- Specific RMBS Losses: UBS incurred losses of nearly USD 900 million on the specific RMBS cited in the DOJ complaint.
- Origination Volume: UBS originated USD 1.5 billion of U.S. residential mortgages between 2005 and 2007 (a miniscule proportion of the over USD 5 trillion market) and originated no subprime loans.
- Penalty Scope: UBS asserts that any FIRREA penalty would be limited to losses suffered by Federally-Insured Financial Institutions (FIFIs), which are lower than UBS's own USD 900 million loss on these securities.
Material Changes and Management Commentary
There are no material changes to financial performance reported in this filing. The document focuses entirely on management's response to the DOJ complaint. UBS states it is confident in its legal position and will contest the complaint vigorously. Management argues that the claims are not supported by facts or law, citing the following points:
- Defense Against Fraud: UBS's massive losses on the assets negate any inference of intentional fraud, as the alleged conduct was against its own economic interest.
- Disclosure: UBS fulfilled disclosure obligations to sophisticated investors, clearly stating risks regarding home price declines.
- Causation: UBS argues that investor losses were caused by the historic, market-wide collapse in U.S. home prices and mortgage defaults, not by alleged misrepresentations.
- Statutory Interpretation: UBS contends the DOJ is misapplying FIRREA, which was intended to protect FIFIs from insider abuse, not to cover all securities sales involving FIFIs.
Investor Verification Checklist
- Verify the specific monetary amount of the civil penalties sought by the DOJ, as the filing states they are "unspecified."
- Monitor the U.S. District Court for the Eastern District of New York for the filing of the full complaint and UBS's formal answer.
- Review UBS's quarterly financial reports to assess if the company has established a specific legal provision or reserve for this litigation.
- Confirm the exact volume of RMBS sold to Federally-Insured Financial Institutions (FIFIs) to understand the potential maximum exposure under UBS's FIRREA interpretation.