Monday, February 25, 2008

The Inevitable Sub-Prime Lawsuits

Here come the inevitable lawsuits over the financial losses from the sub-prime mortgage shakeout.

UBS sued on sub-prime mis-selling
Germany's HSH Nordbank is to sue the Swiss banking giant UBS for mis-selling millions of dollars of investments linked to US sub-prime mortgages.
It wants to recover "significant" losses on a $500m (£253m) portfolio it bought in 2002.

HSH Nordbank alleges that UBS did not manage the assets in line with its "prudent investment objectives".
This will be a common theme in such lawsuits looking to recover these losses, i.e., did the asset manager use the "prudent person" standard when undertaking these investments (see definition at

This is a standard that a fiduciary must follow, making investment decisions that a prudent person would make in pursuit of normal returns and preserving capital, all relative to the risk assumed. In other words, while you don't just put everything in CD's or T-bills and go to sleep, you don't run to the race track with the dough, either.

If you violate this standard, without prior approval by the client, there can be personal liability by the fiduciary for the losses.

Being a fiduciary myself, I can tell you that this is a fairly broad standard, and a big issue will be what was disclosed to client and what did the client authorize be done? If the client was aware of the risk involved and either authorized the investments specifically or gave broad discretion to the fiduciary, it could be a tough go in court for the client.

I really doubt that the fiduciary's undertook these investments without proper signoff, but that is what courts are for to determine.

This will be a very interesting case to watch, I expect many more to be filed, but I also expect them to drag out in court for quite a while. Stay tuned and I will keep you updated as this progresses.

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