Shoveling The 'Vomit': UBS Emails In A Suit Over CDOs

The Wall Street Journal has new details about a lawsuit involving investment bank UBS and a Connecticut-based hedge fund, Pursuit Partners. Pursuit has accused UBS of selling it securities the bank knew were about to be downgraded — putting Pursuit's investment at greater risk.

E-mails that were part of the lawsuit show that UBS employees spoke in frank terms about the securities, collaterized debt obligations — calling them "crap" and "vomit." From the Journal:

On July 11, 2007, Moody's said it would review for possible downgrade a small percentage of the universe of CDOs, just after it cut ratings on subprime-mortgage bonds — the building blocks for many CDOs.

[UBS bond salesman Robert Morelli] sent an email on that day telling colleagues to "put today in your calendar." Mr. Morelli later said in the case the day "was essentially the beginning of the end of the CDO business, meaning the bonds were getting downgraded, they were probably going to get downgraded further, and we were going to lose a lot of money," according to a court transcript cited in Judge Blawie's decision.

On July 26, UBS instructed employees to "reduce cdos ... no need to publicly relay this," the decision says. That day, Pursuit started its purchases from UBS.

On Aug. 28, Mr. Morelli said in an email that he had "sold more crap to Pursuit," according to the decision. On Sept. 24, as the October downgrades neared, an unnamed UBS employee emailed a UBS banker and referred to CDO inventory on UBS's books. "OK still have this vomit?" the employee asked.

Pursuit invested in three CDOs between July and October 2007. A few months later, the company says the securities defaulted and wiped out its entire $35.5 million investment.

On Tuesday, a Connecticut judge ordered UBS to set aside millions of dollars to cover Pursuit's losses. UBS called the decision a "preliminary procedure" and said it was confident it would "prevail on the merits of the case."

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