It's not often that an appeals court says outright that it is sending a message, but that's exactly what a unanimous five-judge appellate panel for New York's First Department did Tuesday in a ruling that dismisses HSH Nordbank's $500 million fraud claim against UBS. The appellate court said that if it permitted HSH to proceed with claims that UBS defrauded the German bank -- despite HSH's sophistication and UBS's abundant warnings about the riskiness of the mortgage-linked synthetic collateralized debt obligation HSH was buying -- "in effect, the message to the corporate and financial world would be that 'it is impossible for two businessmen dealing at arm's length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact,'" wrote Justice David Friedman. "This is a message we decline to send."
Instead, in a message repeated, oh, 10 or 20 times in the court's 37-page decision, the appellate panel said that the bar for sophisticated investors to cry fraud is very high indeed. Specifically, the judges ruled that UBS offered so many and such strongly worded disclosures back when the CDO was marketed in 2002 that HSH can't come to court years later, when the investment has gone bad, and claim it was defrauded. UBS's warnings went far beyond boilerplate, the court held. And even though HSH's lawyers at Quinn Emanuel Urquhart & Sullivan asserted that as a German regional bank, HSH wasn't an expert in CDOs linked to U.S. mortgages, the appeals judges said that fact didn't override HSH's obligation, as a sophisticated investor, to make its own assessment of its contemplated investment.
The two banks engaged in intense negotiations in which HSH specifically agreed that it was not relying on UBS's advice, the decision said. So to permit HSH now to claim fraud, "We would ... have to close our eyes to HSH's sophistication; to HSH's disclaimer of reliance on UBS for advice or on any extra-contractual representations; to the detailed and specific disclosures of risk and conflict of interest in the transactional documents; (and) to HSH's ability to protect itself through the exercise of due diligence," the court wrote. "Such a result would put in question whether any set of disclaimers and disclosures, no matter how detailed and specific, affords protection against a fraud claim -- even a claim by a commercial entity of a high degree of sophistication, and with the resources to hire any outside help it needs."
Got that, sophisticated investors? If the party selling you a complex instrument specifically tells you not to rely on its advice and warns you that it has conflicting interests, you can't sue for fraud in New York. Or, at least, you can't unless and until Tuesday's decision -- a huge win for UBS's lawyers at Paul, Hastings, Janofsky & Walker because it overturned a trial court ruling on HSH's fraud claim -- is reversed by New York's highest court. The appellate court well understood that UBS's disclosures in the CDO offering HSH bought into are similar to those that typically appear in these sorts of incomprehensible-to-mer e- mortals derivative deals. It intends this ruling to have wide ripples.
The opinion does take care to mention that the judges don't condone UBS's allegedly duplicitous behavior. "By no means do we suggest that UBS, if it engaged in the sharp dealing alleged by HSH, is to be commended; such practices are indeed troubling," the appeals court wrote. "Still, however much UBS's alleged conduct leaves to be desired as a matter of business ethics, the undisputed documentary evidence and HSH's own allegations eliminate, as a matter of law, any reasonable inference that HSH justifiably relied on the representations of which it now complains." I could pull out any number of similar quotes from the ruling, but if you haven't gotten the appellate message by now, your sophisticated investor clients are wasting their money.
For good measure, the decision also held that UBS's fraud claims duplicate its breach-of-contract claims and are also barred on those grounds. (The appeals court noted that it has previously ruled that bond insurers can pursue simultaneous fraud and breach-of-contract cases against issuers of mortgage-backed securities, but it distinguished the HSH suit from those.)
UBS counsel Barry Sher of Paul, Hastings and HSH counsel Peter Calamari of Quinn Emanuel declined to comment.
(Reporting by Alison Frankel)
Follow Alison on Twitter: @AlisonFrankel
Follow us on Twitter: @ReutersLegal