The US justice department filed a lawsuit against UBS on Thursday, accusing the Swiss bank of causing investors to lose “many billions of dollars” on residential mortgage-backed securities that it issued in the run-up to the financial crisis.
The suit, launched under a US law that allows authorities to seek civil penalties equal to investor losses, came after a breakdown in negotiations between the Department of Justice and UBS. The two sides disagreed about the size of the settlement UBS should pay, according to a person familiar with the bank’s position.
UBS, which has vowed to fight, issued a release on Wednesday evening ahead of the action, saying: “The DOJ’s claims are not supported by the facts or the law.”
The 302-page complaint seeks damages under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which the justice department has used to secure tens of billions in dollars in settlements from banks following the crisis.
FIRREA allows the DoJ to seek civil penalties up to the amount gained by a bank or lost by others through violations of the act.
“The filing of this complaint makes clear that we will continue to hold financial institutions fully accountable for their conduct and will aggressively pursue financial fraud,” said Richard Donoghue, the US attorney for the eastern district of New York, in a statement.
The lawsuit on Thursday alleged investors in $41bn-worth of residential mortgage-backed securities issued by UBS “lost many billions of dollars, with substantially more in losses projected during the remaining life of the deals”.
A spokesperson for the US attorney’s office declined to say the maximum penalty it could win if it prevailed in the case, which is expected to take years unless there is a settlement.
UBS is one of a handful of banks to go to court to challenge a FIRREA case brought by the justice department.
In 2016, the DoJ was forced to sue Barclays after it refused to settle similar allegations. Earlier this year, Barclays agreed a $2bn settlement, substantially less than the $5bn initially demanded by the government.
The largest settlement remains the $17bn Bank of America agreed to pay in 2014.
UBS has argued that it was not a “significant” originator of US residential mortgages when compared with other banks.
It has also pointed to “huge losses” it made on its own investments in the US housing market. “This fact alone negates any inference that UBS engaged in an intentional fraud,” the bank said in its release on Wednesday.
The lawsuit on Thursday accused UBS of misrepresenting the quality of mortgages it used to back the bonds that it sold. Like in other cases, the DoJ pointed to internal comments by UBS employees.
In 2007, the head of mortgage trading at UBS called a pool of mortgages it had bought from Countrywide “a bag of shit,” according to the lawsuit.
In another example, a UBS trader allegedly said a set of loans from WMC Mortgage Corp were “quite possibly better than little beside leprosy”.