UBS AG (London Branch) & Anor v Kommunale Wasserwerke Leipzig GMBH, Court of Appeal - Commercial Court, November 04, 2014, [2014] EWHC 3615 (Comm)

Resolution Date:November 04, 2014
Issuing Organization:Commercial Court
Actores:UBS AG (London Branch) & Anor v Kommunale Wasserwerke Leipzig GMBH

Neutral Citation Number: [2014] EWHC 3615 (Comm)

Case No: 2010 Folio 50

2010 Folio 1224

2010 Folio 500

2010 Folio 505




Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 04/11/2014

Before :


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Between :

Case No: 2010 Folio 50

2010 Folio 1224

And Between :

Case No: 2010 Folio 500

And Between :

Case No: 2010 Folio 505

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Lord Falconer, Mr Richard Slade QC, Mr Jonathan Dawid and Mr Edward Harrison (instructed by Mayer Brown International LLP) for the UBS parties

Mr Tim Lord QC, Mr Simon Salzedo QC, Mr Stephen Midwinter and Mr Craig Morrison (instructed by Addleshaw Goddard LLP) for KWL

Mr David Railton QC, Mr Edward Levey and Mr Richard Power (instructed by Dentons UKMEA LLP) for DEPFA

Mr Nicholas Peacock QC, Miss Catherine Addy and Miss Fiona Dewar (instructed by Baker & McKenzie LLP) for LBBW

Hearing dates: 29th April - 31st July 2014

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Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.



Mr Justice Males :


  1. In 2006 and 2007 the Leipzig municipal water company (``KWL'') sold credit protection to the investment bank UBS and to two other banks (``LBBW'' and ``Depfa'') on four portfolios of investment grade bonds and other securities. It did so by means of a series of complex derivative products known as Single Tranche Collateralised Debt Obligations (``STCDOs''). The effect of these STCDOs was in each case that if any ten or so of the entities in the portfolios defaulted during an eight or ten year period, KWL would be liable to pay the banks tens or even hundreds of millions of dollars (or the equivalent in other currencies). These defaults duly occurred following the global financial crisis of 2008-9 and the banks now seek payment of the sums due under the STCDOs.

  2. KWL defends the banks' claims on the grounds that the STCDOs were void because it did not have capacity (or its managing directors who signed them did not have authority) to enter into such contracts, and that they were voidable and have been avoided on various grounds (bribery, conflict of interest and fraudulent misrepresentation). In addition, if the STCDOs were valid and binding, it contends that the losses suffered on the portfolios were caused by their negligent management by the portfolio manager UBS Global Asset Management (UK) Ltd (``UBS GAM'').

  3. At first sight it seems surprising that a municipal water company should engage in the speculative business of selling credit protection which, if things went wrong, would expose it to liabilities on such a scale. Much the same thought was expressed in more colourful terms in an internal Depfa email of November 2008:

    ``You have to wonder what in the name of God a utility company were doing selling protection on this portfolio!! They must have been persuasive UBS salesmen!!!''

  4. How this came about has been closely examined during a trial lasting 42 days. The trial has revealed a sorry story of greed and corruption from which neither UBS nor KWL emerges with credit.

    The transactions in outline

  5. There were four transactions concluded. In each case:

    a. KWL entered into a Credit Default Swap (or ``CDS'') with UBS by which it bought credit protection against default by investment grade entities (or ``single names'') - respectively ``Balaba'', ``Merrill Lynch'', ``GECC'' and ``MBIA'' - which had provided it with bonds or payment undertakings in connection with cross-border leases into which it had previously entered.

    b. KWL sold credit protection (to UBS in one case and to LBBW and Depfa in the remaining cases) in respect of a diversified portfolio of assets by means of an STCDO.

    c. The credit protection sold by KWL covered a mezzanine tranche of a notional "Reference Portfolio" comprising a number of "Reference Entities"; the effect of this was that KWL' s liability to its counterparty bank would be triggered if credit events affected a sufficient number of Reference Entities during the term of the STCDO that the fall in the notional value of the portfolio exceeded a contractual threshold called the "attachment point", while KWL's liability would be exhausted and the value of its investment would be totally lost once losses exceeded a further threshold called the "detachment point"; although the figures varied from one STCDO to another, the attachment point was in each case around 3.5% and the detachment point was around 5% of the nominal value of the portfolio.

    d. KWL entered into a Portfolio Management Agreement with UBS GAM by which UBS GAM undertook to manage the underlying reference portfolios of the STCDOs.

  6. The STCDO elements of the four transactions were as follows:

    a. The first STCDO was between KWL and UBS and was dated 8 June 2006. This was combined with a CDS by which KWL bought protection from UBS against default by Bayerische Landesbank (``Balaba'').

    b. The second STCDO, dated 8 September 2006, was between KWL and LBBW and was combined with a CDS by which KWL bought protection from UBS against default by General Electrical Capital Corporation (``GECC'').

    c. The third and fourth STCDOs, both dated 28 March 2007, were between KWL and Depfa and were combined with CDSs by which KWL bought protection directly from UBS against default by Merrill Lynch Capital Services Inc (``Merrill Lynch'') and MBIA Global Funding LLC (``MBIA'').

  7. Each of these STCDOs resulted in an upfront premium payable to KWL. The total net premium (after deducting the costs of the CDSs) on all four STCDOs was US $28.1 million plus €6.4 million. However, only about US $6 million (or €4.5 million) of this was ever received by KWL. The remainder was siphoned off by Berthold Senf and Jürgen Blatz of Value Partners Group AG, a Swiss company which purported to provide financial advice to KWL. From this net premium of over US $30 million they paid a bribe of about US $3 million to one of KWL's two managing directors, Klaus Heininger. There is an issue whether UBS is to be regarded as the principal of Value Partners so as to be responsible in law for the payment of this bribe, but as a matter of fact nobody at UBS was aware of the bribe.

  8. UBS had originally planned to conclude all of these STCDOs with KWL directly in June 2006, but could not obtain internal credit approval to do so. It therefore concluded only the Balaba STCDO with KWL and sought other banks (in the event, LBBW and Depfa) to act as intermediaries between it and KWL on the other transactions. LBBW and Depfa concluded their STCDOs with KWL acting as principals, but having bought STCDO protection from KWL, they each entered into STCDOs with UBS by which they sold the same protection to UBS on back to back terms. The STCDOs between KWL and LBBW/Depfa have been referred to in this action as the ``Front Swaps'', while the STCDOs between LBBW/Depfa and UBS have been referred to as the "Back Swaps".

  9. With the exception of the LBBW Front Swap, which is subject to a German Rahmenvertrag für Finanztermingeschäfte, each of the STCDOs is subject to an ISDA Master Agreement.

  10. Between 2008 and 2010, credit events took place on the Reference Portfolios with the effect that losses on the Balaba portfolio exceeded the relevant attachment and detachment points and the remaining STCDOs were subject to Early Termination. Under the terms of the STCDOs, if they are valid and binding, significant sums therefore became payable by KWL to the banks and by LBBW and Depfa to UBS.

    The proceedings

  11. The LBBW Front Swap is subject to the jurisdiction of the German courts. On 3 June 2013 that STCDO was held by the Leipzig Regional Court at first instance to be valid and binding on KWL, although the quantum of KWL's liability to LBBW has not yet been determined. That decision on liability is subject to an appeal by KWL to the Dresden Court of Appeal. I am told that a decision on KWL's appeal is not expected for many months, and in any case not until some time next year. The role of LBBW in the proceedings before me is therefore limited to the issues between it and UBS as to the effect of the LBBW Back Swap.

  12. The remaining transactions are subject to the jurisdiction of this court. In the case of the Balaba STCDO and the Portfolio Management Agreements, this was determined by Gloster J following a challenge to the jurisdiction of this court by KWL: see her judgment on jurisdiction at [2010] EWHC 2566 (Comm).

  13. This has been the trial of four actions heard together (two of which have been formally consolidated).

    The principal claims and counterclaims

  14. In summary, the principal claims and counterclaims are as follows.

    The Balaba STCDO

  15. UBS seeks to recover from KWL US $137,637,059.58, being the net sum which it claims to be due under the Balaba STCDO after giving credit for sums due to KWL under the GECC, MBIA and Merrill Lynch single-name CDSs which were ``in the money'' for KWL at the date when the Balaba STCDO terminated automatically on exhaustion of KWL's tranche (the Balaba CDS having been unwound by agreement at an earlier stage).

  16. KWL resists that claim on the grounds mentioned at [2] above. In outline:

    a. It is common ground that the question of KWL's capacity to enter into the Balaba STCDO and the authority of its managing directors to conclude such a transaction is a question governed by German law. It depends on two issues. The first is whether KWL was required by its Articles of Association to obtain the prior approval of its Supervisory Board to the transaction, which depends in turn on whether the transaction was of ``fundamental significance'' to KWL within the meaning of its Articles. The second is whether, if such approval was required, that requirement was so obvious to UBS that UBS's failure to recognise it was (in short) grossly negligent.

    b. Whether the transaction was voidable on account of the bribery of Mr Heininger by Value Partners depends on whether for this purpose Value Partners is to be regarded as the agent of UBS. There is no doubt that, for most purposes, Value Partners was acting as the agent of KWL, with whom it had a pre-existing (and already corrupt) relationship. In principle, however, there would be nothing to prevent it from agreeing to act also as UBS's agent, although that would put it in an impossibly conflicted position. It will therefore be necessary to examine whether there was a relationship of agency established between UBS and Value Partners and, if so, whether (albeit unknown to UBS) the bribe was paid within the scope of that relationship.

    c. Even if there was no such agency relationship, KWL contends that the dealings between UBS and Value Partners were such that Value Partners was subject to a conflict of interest which was known to UBS and to which KWL did not consent, and that the STCDO was voidable on this ground. Under this heading it will be necessary to consider whether there was such a conflict, whether UBS was aware that Value Partners was not giving disinterested advice to KWL and, if so, whether KWL gave its informed consent to that situation.

    d. Finally, KWL contends that the Balaba STCDO was voidable for fraudulent misrepresentation by UBS. The principal representations alleged to have been made by UBS concern the effect of the STCDO - that it would be virtually risk free for KWL and/or would represent a reduction in the risks to which KWL was exposed. It will therefore be necessary to consider (among other things) whether such representations were made, whether they were made dishonestly and, if so, whether they were relied on by KWL in deciding to enter into the STCDO.

    e. In addition to its contention that the Balaba STCDO was voidable by reason of bribery, conflict of interest and misrepresentation, KWL contends that it is entitled to damages from UBS by reason of such matters, including damages comprising any sums which it is held liable to pay to LBBW or Depfa under the LBBW and Depfa Front Swaps.

  17. In the alternative to its claims to enforce the Balaba STCDO directly, UBS seeks an equivalent sum from KWL by way of damages for breach of warranties and representations made in some of the other documents connected with the transaction which were signed by KWL. These were broadly to the effect that KWL was entering into the transaction in good faith and in the ordinary course of business, that it had obtained all necessary approvals, that it would assess the risks of the transactions for itself and that it was not relying on UBS for investment advice or recommendations.

  18. KWL contends that these alternative claims stand or fall with UBS's claim under the STCDO so that if the STCDO is void or has been avoided, these ancillary claims can have no independent life, while if UBS's claim under the STCDO succeeds, these claims add nothing.

  19. In the event that the Balaba STCDO is held to be void or to have been avoided, UBS claims the return of the premiums paid under each of the STCDOs.

  20. UBS also seeks the return of the £3.3 million paid to KWL on the unwinding of the Balaba CDS in September 2008.

    GECC, MBIA and Merrill Lynch single-name CDSs

  21. KWL claims US $66,916,676 from UBS, being the sum due to it on the Early Termination of the GECC, MBIA and Merrill Lynch single-name CDSs which were ``in the money'' for KWL.

    The LBBW Back Swap

  22. UBS seeks to recover from LBBW €75,473,025, being the sum which it claims to be due on the Early Termination of the LBBW Back Swap.

  23. LBBW resists that claim, contending that the LBBW Back Swap has been validly rescinded for misrepresentation by UBS. The representation on which it principally relies is that UBS believed Value Partners and Mr Heininger to be honest, when in fact it knew that they were not. The principal issue here is whether for this purpose the knowledge and intention of a UBS employee called Steven Bracy is to be regarded as that of UBS.

  24. Alternatively, LBBW contends that on an Early Termination of the STCDO its only liability to UBS is to pay what it is actually paid by KWL (which so far is nothing). In the further alternative it says that it is under no liability to UBS in the event that the LBBW Front Swap is held on KWL's appeal in Germany to be void or to have been avoided.

    The Depfa Back Swaps

  25. UBS seeks to recover from Depfa US $83,342,278, being the sum which it claims to be due on the Early Termination of the Depfa Back Swaps, Depfa having already paid US $32,606,699.31 to UBS.

  26. Depfa resists that claim, contending that the Depfa Back Swaps have been validly rescinded for misrepresentation by UBS. Like LBBW, the representation on which it principally relies is that UBS believed Value Partners and Mr Heininger to be honest.

  27. Alternatively, Depfa contends that it is under no liability to UBS in the event that the Depfa Front Swaps are held to be void or to have been avoided. It seeks to recover the payment which it has already paid to UBS as money paid under a mistake.

    The Depfa Front Swaps

  28. Depfa seeks to recover US $116,025,971 from KWL which it claims to be due on the Early Termination of the Depfa Front Swaps. This claim is contingent on Depfa being held liable to UBS on the Back Swaps.

  29. KWL resists this claim, essentially on the same grounds as it resists UBS's claim under the Balaba STCDO, contending that for this purpose the conduct and knowledge of UBS are to be attributed to Depfa and, in addition, that Depfa was itself grossly negligent in failing to recognise the need for prior approval of the transaction by KWL's Supervisory Board.

    The portfolio management claim

  30. In the event that the Balaba STCDO, the LBBW Front Swap or the Depfa Front Swaps are binding on KWL, KWL seeks to recover damages from UBS GAM for the negligent management of the STCDO portfolios.

  31. These claims and counterclaims will require further explanation, but this summary should be sufficient to set the scene.


  32. I now introduce the principal participants in these transactions. Those whose names are italicised when first mentioned gave oral evidence at the trial. Most of the UBS witnesses are no longer employed by UBS. Those relatively few whose names are underlined when first mentioned are still UBS employees.

    UBS Investment Bank

  33. The claimants are UBS AG, a bank incorporated in Switzerland, and UBS Ltd, an English subsidiary of UBS AG. It is unnecessary to distinguish between them. It is, however, necessary to distinguish between UBS's role as an investment bank and its role as a portfolio manager, which was carried out by UBS Global Asset Management (UK) Ltd. I shall therefore refer to the investment bank as ``UBS'' and to the portfolio manager as ``UBS GAM''.

  34. UBS was and is regarded as a blue chip investment bank although, like many financial institutions, it had to be bailed out during the financial crisis of 2008-9. This appears to have been the result, at least in part, of disastrous trading in CDOs for UBS's own account.

    UBS's top management

  35. The Chief Executive Officer of the investment bank during this period was Huw Jenkins and the Global Head of Fixed Income was Simon Bunce. Chris Ryan was the Global Head of Credit Fixed Income. These were very senior individuals who became involved in overruling the refusal by UBS's internal control function to approve the STCDO transaction with KWL. That proved to be a very bad decision.

    The Credit Structuring Team

  36. The structuring of the STCDO transaction (or, as they became, transactions) was primarily the responsibility of the Credit Structuring Team of UBS's London branch.

  37. Paul Czekalowski was head of Credit Structuring at the relevant time. He led a group from which a ``deal team'' would be drawn to work on individual transactions. In the case of the transaction with KWL, the deal team included (in addition to Mr Czekalowski) Oscar Sanz-Paris, Manish Mehta, Bryon Lancaster and Alexander Davies. Mr Sanz-Paris and Mr Mehta both had structuring roles, with Mr Sanz-Paris taking the main role in structuring the transaction, subject to Mr Czekalowski's oversight. Mr Mehta was more junior and worked under Mr Sanz-Paris's direction. He was primarily involved in the mechanics of the transaction and preparing drafts of presentation materials.

  38. Mr Lancaster and Mr Davies were both legally trained and, while not practising as lawyers, fulfilled a quasi-legal role in preparing and reviewing transaction documentation and liaising with UBS's internal control functions. Mr Lancaster was the senior of the two, with Mr Davies being involved only when Mr Lancaster was unavailable.

    Municipal Securities

  39. UBS's Municipal Securities Group was part of UBS Securities LLC, a US-incorporated subsidiary of UBS AG. One of the Group's employees was Steven Bracy, who had previously worked in the Global Lease Finance Group of Credit Suisse First Boston (``CSFB''). As a result of this experience Mr Bracy was well connected in the world of cross-border leasing and in particular knew Mr Senf and Mr Blatz of Value Partners, who had been his colleagues at CSFB in the period 1998-2000. Mr Bracy was not a structurer, but he was the point of contact between Value Partners and the UBS deal team.

  40. By 2006 the tax loophole which cross-border leases were designed to exploit was closed or closing. The market for new leases was therefore drying up. Mr Bracy was therefore looking for other opportunities for business for himself and the Municipal Securities Group. In his own words, he was anxious to ``stay relevant'' within UBS. Ultimately the Group was closed and Mr Bracy left UBS in June 2008. The evidence in this case shows that this was not a moment too soon.

    Debt Capital Markets

  41. The Debt Capital Markets team (``DCM'') was a London based group within UBS responsible for marketing the capabilities and services of the bank in relation to bond issues and derivatives. One German member of DCM was Tilo Kraus. He was brought in to assist on the transaction with KWL when the deal team needed the assistance of a German speaker.

  42. The head of DCM was Philippe Jordan, who had a somewhat strained relationship with Mr Czekalowski who felt that DCM was not doing enough to source work for Credit Structuring. Mr Jordan and Mr Bracy regarded each other with suspicion and dislike. Mr Bracy, like DCM, was playing a client relationship role and so saw DCM as unwelcome competition for his contacts and his remuneration. Mr Jordan viewed Mr Bracy as trespassing on his turf.


  43. The Structured Trading Desk was responsible for pricing and hedging the STCDO element of the transaction. As explained further below, UBS sought to remain ``market neutral'' under the STCDOs by itself selling credit protection which aimed to match, in market terms, that sold to it by KWL. This hedging in turn generated the revenue to fund the premium paid to KWL, UBS's own costs and reserves, and its profit from the deal.

  44. Adam Johnson was the senior trader on the Structured Trading Desk responsible for the transaction. He worked with Credit Structuring to provide indicative pricing, and determined the level of hedging to be sold on each name in the portfolio on the trading date of each STCDO.

  45. UBS also sought to hedge its credit exposure to KWL, that is to say the risk that KWL would not pay if called upon to do so. This was the responsibility of the Derivatives Credit Exposure Management desk under Duncan Rodgers.

    Control functions

  46. UBS's internal processes required the transaction to be approved by various control functions of which Credit Risk Control (``CRC'') was the most important for present purposes. Because this was a large, complex and unusual transaction, it was designated as a ``Transaction Requiring Prior Approval'' (or ``TRPA'') before it could be concluded. The primary concern of CRC was to make an assessment of the risk that a counterparty would default under a transaction and of what recovery might be made from it in that event. CRC would also consider the suitability of the transaction for the counterparty, although UBS's internal policies made clear that the primary responsibility for this lay with the deal team.

  47. The Credit Officer assigned by CRC to the KWL transaction was Marcus Linfoot. He was then relatively junior. At a higher level within CRC was Jeanne Short, UBS's Chief Credit Officer for Europe. She reported to UBS's Chief Risk Officer, David Bawden.


  48. UBS GAM's CDO management team was headed by a Portfolio Manager. From the commencement of the transaction until September 2008 this was Sunil Dattani, who then left UBS to join another financial institution in Singapore. He was succeeded by Paul Jong Woo, who was in turn succeeded in June 2010 by Michael Klene. Mr Woo provided a witness statement as did Mr Klene. Mr Klene was tendered for cross examination but KWL did not require him to be called.

  49. The Portfolio Manager was able to draw upon credit analysis performed by UBS GAM's credit research team who also provided similar support to other teams within the Fixed Income Group.


  50. Kommunale Wasserwerke Leipzig GmbH is a municipal water company based in Leipzig in what was formerly East Germany. Its business is to provide fresh water and sewage facilities to the City of Leipzig and the surrounding area. At the relevant time it was the fifth largest water and sewage utility in Germany. Its majority shareholder, with a 75% shareholding, is LVV Leipziger Versorgungs-und Verkehrsgesellschaft mbH (``LVV''), which in turn is owned by the City of Leipzig. Although ultimately in public ownership, KWL is incorporated as a private company (GmbH).

  51. At the relevant time, the Executive Board of KWL consisted of two managing directors, Klaus Heininger and Andreas Schirmer. Broadly speaking, Mr Heininger took the lead on commercial matters while Dr Schirmer dealt with technical matters. Others at KWL included Lutz Reichardt, the head of KWL's finance department who visited UBS in September 2006 to sign some of the LBBW transaction documentation and Michaela Barth, then the head of KWL's Executive Office who is now married to Mr Heininger.

  52. KWL also had a Supervisory Board. This was the body whose function under German law was to provide oversight of the Executive Board's activities. It was not itself an executive body, although KWL's Articles required certain matters to be approved in advance by the Supervisory Board. Its members included trade union representatives and political appointees and it appears that it sometimes divided on party lines. No one on the Supervisory Board had any involvement with or knowledge of the transaction with UBS until (at the earliest) 7 September 2006, when Mr Heininger made a presentation to the board although it appears that even then board members did not appreciate that any transaction had actually been concluded. By that time the Balaba transaction with UBS and the GECC transaction with LBBW had already been concluded (although the latter only traded the following day). Three members of the board gave evidence, Andreas Müller, Holger Schirmbeck and Lothar Tippach.

    Value Partners

  53. Value Partners Group AG, a Swiss company, played an important role in the transaction. Precisely what that role was, and in particular whether Value Partners is to be regarded as the agent of UBS, KWL or both, is one of the principal issues in the case. Certainly Value Partners purported to act as KWL's financial adviser, although KWL contends that it should be regarded as UBS's agent. The key principals of Value Partners were Berthold Senf, Jürgen Blatz and Julian Cox. All three were former bankers. Mr Senf and Mr Blatz had been head of CSFB's Global Lease Finance Groups for Switzerland and Germany respectively. Mr Cox had been a managing director at Bank of America. Before forming Value Partners, Messrs Senf and Blatz had worked at a company called Global Capital Finance. Although it would appear that not everyone at Value Partners was corrupt (in particular, it appears that Mr Cox was not), for the purpose of this case it is unnecessary to distinguish between Value Partners and Messrs Senf and Blatz.

  54. Value Partners and its principals had a history of working with KWL prior to the transactions in issue, Global Capital Finance having advised KWL in connection with its cross-border leases since 2003. In the course of this history, a corrupt relationship had developed between Mr Heininger and Messrs Senf and Blatz. It began with extravagant gifts and expenses paid luxury trips, but by April and May 2005 it had escalated to outright bribery, with a cash payment of €945,945 paid to Mr Heininger in connection with a cross-border lease concluded by KWL, together with a donation of €150,000 to the Leipzig football club which he supported. The corruption extended (unknown to UBS) to the transactions in issue in this case, with Mr Heininger, Mr Senf and Mr Blatz conspiring to extract the greater part of the upfront premium paid to KWL for their own personal benefit. To some extent this was notionally authorised by an engagement letter, dated 31 May 2006 but signed by Mr Heininger and Dr Schirmer on 14 June 2006, which purported to confer on Value Partners all proceeds of the transaction in excess of €4.5 million.

  55. All three of Messrs Heininger, Senf and Blatz have been convicted in Germany for a range of fraud, bribery, embezzlement and taxation offences. I understand that they are currently on bail.

  56. Apparently they have all expressed willingness to cooperate with KWL by giving evidence in this case, no doubt in the hope of receiving lighter sentences, but KWL decided not to adduce evidence from them. UBS submits that this must be because their evidence would have been unhelpful to KWL. It may very well be that it would have been. It seems to me, however, that the extent to which there would have been any real cooperation from these individuals is highly speculative and that it is not surprising that KWL would not have wished to rely on evidence from patently dishonest witnesses.

    The external lawyers

  57. UBS and KWL both engaged external lawyers to advise them in connection with the STCDO transactions. UBS instructed Allen & Overy while KWL instructed Freshfields Bruckhaus Deringer. As well as providing legal advice to KWL, Freshfields also provided legal opinions to UBS, LBBW and Depfa dealing (among other matters) with the question of KWL's capacity to enter into the transactions. The partners at Freshfields handling the transactions were Claus Pegatzky, Frank Laudenklos and Daniel Reichert-Facilides of Freshfields' Frankfurt office.

  58. At least some of the advice provided by Freshfields to KWL is in evidence, as are some of Freshfields' internal communications. However, UBS has claimed privilege (as it is entitled to do) for the advice provided to it by Allen & Overy and by its own internal legal department.


  59. LBBW is a German bank, the Landesbank for Baden-Württemberg, which in its role as an intermediary entered into separate back-to-back STCDOs with KWL and UBS.

  60. LBBW was keen to build up a CDO business and saw its role in this transaction as an opportunity to do so. Its Global Head of Credit Capital Markets was Mark Northway, who had overall responsibility for the deal. He had only recently joined LBBW, but had experience of CDO transactions from his previous work at Rabobank, including some intermediation transactions. He also had experience of dealing with municipalities. He was based in London, as was Gesine Schmidt, LBBW's Head of Securitisations, who was the main LBBW point of contact with UBS.

  61. Harald Müller, LBBW's Director of the Structured Credit and Fund Derivatives desk, was based in Stuttgart. So was Falk Weishaupt, a lawyer in LBBW's Legal International Business Department who was responsible for LBBW's internal ``legal sign off'' on the LBBW transaction, although he was actually in New York for much of the relevant time.


  62. DEPFA Bank Plc is a bank with German origins, although it moved its headquarters to Dublin for tax reasons. It specialised in lending to municipalities. During the financial crisis it was bailed out by the German government and is now owned directly or indirectly by the German state. It is currently in run off.

  63. In about mid 2006 Depfa established a new structured finance team headed by David Geoghegan who had previously worked in structured finance at various banks. Like LBBW, its role in the transaction was as an intermediary between UBS and KWL. It saw this as an opportunity to expand its public sector lending expertise into more specialised non-lending transactions with public sector clients.

  64. Most of the communications between UBS and Depfa went between Tarek Selim of UBS (although he did little more than pass on messages) and Ravi Gidoomal, a member of the structured finance team headed by Mr Geoghegan, who was Mr Gidoomal's line manager. Fiona Flannery was head of Credit Risk Management and chaired Depfa's credit committee at the relevant time. Burkhard Wiehler was a qualified (but fairly junior) German lawyer who at the material time was an in-house lawyer at Depfa with legal responsibility for the transaction.


    Standard of proof

  65. Although the standard of proof in civil proceedings is the balance of probabilities, many of the issues in this case involve allegations of serious wrongdoing. I bear in mind, therefore, what Lord Nicholls said in In re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at 586, as endorsed by the House of Lords in In re B (Children) [2008] UKHL 35, [2009] 1 AC 11:

    "The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence. ...''


  66. There is a very substantial volume of documentary evidence, much of it in the form of contemporary emails and their attachments. There has been very extensive - and, I see no reason to doubt, full - disclosure from UBS and Depfa which for the most part provides a more or less comprehensive view of contemporary events as they unfolded. The disclosure from LBBW is probably less full, but that is largely due to the more limited scope of the issues affecting LBBW which arise for decision in this trial and the more limited scope of the disclosure which it was required to give as a result.

  67. In addition to its documentary disclosure, including data from no fewer than 48 custodians, UBS and UBS GAM called oral evidence of fact from 14 witnesses (and tendered one more whose attendance, in the event, was not required). These included almost all those individuals who had a material involvement with the transactions in issue (but not Mr Ryan, although at one time UBS indicated that it intended to obtain evidence from him), despite the fact that most of the witnesses are no longer employed by UBS. In at least one important case (I refer to Mr Bracy) it must have been obvious to UBS that the witness's evidence under cross examination was unlikely to advance its case and that the co-operation which the witness was prepared to give would be limited (despite his central role, Mr Bracy produced an initial witness statement of only eight pages). In my view there is force in the submission made by UBS that it has gone to considerable effort to ensure that a full picture of relevant events is before the court. For that it is to be commended.

  68. In contrast, documentary disclosure from KWL has been limited. Some important documents (which in some respects contradicted the evidence of KWL's main witness, Dr Schirmer) were only disclosed during the trial after KWL's witnesses had given evidence. KWL called only four witnesses, Dr Schirmer and three members of its Supervisory Board. Some potentially important witnesses were not only not called, but exercised rights which apparently they have under German law to refuse to permit disclosure of their emails. These included Mr Reichardt and Ms Barth (now Mrs Heininger). Ms Barth appears to have held KWL's key archive of documents relating to the transactions, so her refusal to permit disclosure of her emails was particularly regrettable. It would seem likely that both of these, and others too, would have had relevant evidence to give and that, as a result of their refusal to allow disclosure, documents which might have thrown important light on the extent to which the transactions in issue and aspects of Mr Heininger's relationship with Value Partners were (or for that matter were not) known about and understood within KWL have not been produced. Ms Barth, for example, was one of those who accompanied Mr Heininger and others on a luxury trip to Dubai, paid for by Global Capital Finance, in October 2003.

  69. The consequence of this lack of disclosure and evidence from KWL has been twofold. First, there is no doubt that the picture which I have of events at KWL and the knowledge of various individuals is incomplete, although whether in important respects is difficult to say. Second, the sheer volume of material and the number of witnesses from the UBS side has inevitably meant that the main evidential focus of the trial (19 days in all) has been taken up with an intense scrutiny of the evidence of the UBS witnesses. I bear both these points in mind when making my findings of fact.

    General approach to witnesses

  70. In making those findings I am principally guided by the contemporary documents and by the inherent probabilities of the case, judged as best I can in the light of the documents and my overall assessment of the witnesses. Inevitably, when giving evidence about events so long ago (for the most part in 2006 and early 2007), witnesses cannot be expected to have a detailed or accurate recollection of events, let alone of such matters as precisely who said what at particular meetings or what they knew at particular times. The usual difficulties of recollection (see Gestmin SGPA SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) at [15] to [22]) are aggravated in this case by the effect of hindsight. These were transactions which went so disastrously wrong that it is natural for witnesses to have persuaded themselves by a combination of hindsight and wishful thinking, in some cases perfectly honestly, that they did or said or thought things (or that they did not) at the time, or that they had less to do with the transactions than was in fact the case. There was also a tendency for some witnesses to be defensive about the role which they played and (in my view) to give evidence, not of what they actually did but of what they now wish they had done. Such evidence was not necessarily dishonest.

  71. With oral evidence from so many witnesses of fact (14 from UBS, four from KWL, five from LBBW and five from Depfa) it would be impracticable and of no real benefit to record detailed impressions about the reliability and truthfulness of each of them. I should, however, say something about some of the principal witnesses, in particular (but not exclusively) those I find to have been deliberately untruthful.

  72. I should also record that with so many witnesses and with four separate parties involved, it was necessary for the trial to proceed in accordance with a fairly tight timetable. Without this, the trial could easily have taken much longer. I am grateful to all parties for ensuring that the timetable was adhered to. I am satisfied that the time available afforded all parties a proper opportunity to put their respective cases. Nobody suggested otherwise. Inevitably, however, the need to work to such a timetable means that some avenues may not have been as fully explored in cross examination as they might otherwise have been. I have borne this in mind.

    The UBS witnesses

    Mr Steven Bracy

  73. Mr Bracy was a thoroughly dishonest man and dishonest witness. He had obviously been heavily coached (by his own lawyers who attended the trial during the four days when he gave evidence, not by UBS's) and was highly evasive, refusing to give straight answers to simple questions. From a long list, four examples of his dishonesty will suffice.

  74. First, he deliberately deceived his colleagues at UBS, including the CRC, as to KWL's credit rating, passing on an out of date shadow credit rating and suppressing a lower but more up to date rating in case the lower rating jeopardised approval of the deal (see [259] below). This alone was conduct for which, if it had come to light, other UBS witnesses said that he should have been fired. It shows the lengths to which he was prepared to go to promote the deal.

  75. Second, there was clear evidence that Mr Bracy made a number of fraudulent expenses claims while at UBS. Although he failed to disclose this in his second witness statement, he has been barred from associating with any member of FINRA, the US financial regulatory authority, as a result of refusing to co-operate with an investigation into expenses frauds while at UBS and also while working for a later employer. In the event FINRA made no findings whether Mr Bracy was guilty of making fraudulent expenses claims, but the evidence before me made it abundantly clear that he was.

  76. Third, I have no doubt that Mr Bracy understood perfectly well that KWL's priority in entering into these transactions was to obtain upfront cash, and that for this purpose it was prepared to accept some additional risk. That was made very clear to him in his dealings with Value Partners. However, he was concerned that to present this to CRC as KWL's objective would be likely to result in approval being refused. He took steps to ensure, therefore, that the deal was presented to CRC as an exercise in risk reduction, for example by briefing Mr Heininger about the line which he should take when he met Mr Linfoot, a representative of CRC, on 30 May 2006. In the event, Ms Short and Mr Bawden refused to approve the transaction anyway, but this was nevertheless an attempt by Mr Bracy to mislead UBS's own control function. For tactical reasons neither party emphasised this aspect of Mr Bracy's evidence, UBS because it had no interest in further undermining his evidence and KWL because its case was that the purpose of the transaction was in fact to reduce risk and was represented to it as such by UBS. However, I have no doubt that this is in fact what happened.

  77. Fourth, in what was described as the ``letter for K'' episode, when requested by Messrs Senf and Blatz in October 2006 to fabricate false evidence that a trip to Dubai to which they had treated Mr Heininger in 2003 had been for legitimate business purposes, he willingly co-operated (see [456] below). His evidence that he had merely pretended to co-operate, stringing Messrs Senf and Blatz along while hoping that the issue would go away, was quite obviously a pack of lies. The ``letter for K'' episode only emerged clearly in the course of Mr Bracy's cross examination, although UBS has not denied that it was aware of this incident before his evidence began. It casts important light on the nature of Mr Bracy's relationship with Value Partners. As I shall explain, he knew from the outset that Mr Senf and Mr Blatz were not acting in KWL's best interests. In connection with the ``letter for K'' episode it appears to have come as no surprise to him that they were acting dishonestly to cover up an inappropriate relationship with Mr Heininger. His reaction to their request was not that of an honest man.

  78. These and other matters were not only put to Mr Bracy but also to Ms Short, an entirely honest and fair minded UBS witness. She was obviously horrified. The full extent of her reaction did not really appear from her answers on the transcript, frank as these were, so I put it to her in these terms, with which she agreed:

    ``MR JUSTICE MALES: To be blunt about this -- and you haven't, of course, seen all of the evidence in the case, or heard all of what Mr Bracy had to say about this -- but in your opinion, would it be fair to say that on the face of these emails, if we take the whole run of emails that you have been shown at face value, there was something of a rotten apple in the UBS barrel?

    A. It's exactly what I would have said, yes.

    MR JUSTICE MALES: It rather looked from the expression on your face as if that was what you were thinking.

    A. Yes, precisely.

    MR JUSTICE MALES: And I wanted to see if that was right.

    A. Yes, indeed.''

  79. While I would not exclude the possibility that Mr Bracy may sometimes have given truthful answers, I conclude that no weight can be placed on his evidence save to the extent that it consists of admissions or is corroborated by the contemporaneous documents. When those contemporaneous documents were authored by Mr Bracy, as many of the important documents in the case were, I bear in mind also his tendency to boast about his achievements to his superiors and to exaggerate the importance of his own role. Messages of that kind cannot necessarily be taken at face value.

  80. Two further points concerning Mr Bracy are important. The first is that UBS expressly accepted in the course of its opening submissions that for the purpose of any question about what UBS knew or should have known, what Mr Bracy knew or should have known would count as the knowledge of UBS. At a later stage of the trial a question arose whether that acceptance covered issues arising out of the ``letter for K'' episode which gave rise to amendments of their pleadings by other parties after Mr Bracy had given evidence. I consider that it did not. Nevertheless the admission did apply (and is accepted by UBS to apply) to all issues on the pleadings as they then stood. These included in particular KWL's agency/bribery, conflict of interest and misrepresentation defences (see [16] above) and UBS's claim for damages for misrepresentation against KWL (see [17] above). Accordingly, any issue about the scope of UBS's admission will only matter if the position of Mr Bracy was materially different in relation to the ``letter for K'' episode on the one hand and the other issues where it is accepted that his knowledge is to be regarded as the knowledge of UBS on the other. In my view his position was materially the same for all these purposes. I would add that the admission made by UBS as to the position of Mr Bracy was inevitable on the evidence which I heard.

  81. The second point is that at the pre trial review in this case an application by KWL to amend its pleading to allege that employees of UBS (principally Mr Bracy) knew of, or turned a blind eye to, the fact that Value Partners intended to misappropriate money for itself out of the upfront premium payable to KWL was refused, although KWL's application to amend did not go so far as to allege that UBS knew that Mr Heininger was acting corruptly for his own benefit. KWL did not seek to appeal against that application or renew its application at the trial, even after the evidence about the ``letter for K'' episode emerged. In those circumstances it is not open to KWL to advance a positive case that UBS was aware, either that Value Partners intended to misappropriate money for itself or that it proposed to bribe Mr Heininger. Nevertheless the evidence about the ``letter for K'' episode does show beyond any possibility of doubt that Mr Bracy knew from September 2006 at the latest that Messrs Senf and Blatz were dishonest and in my judgment it is equally clear that it did not surprise him in the slightest that they were acting dishonestly to cover up an inappropriate relationship with Mr Heininger even if he was not aware of the precise respects in which it was dishonest.

    Mr Oscar Sanz-Paris

  82. Although described by Mr Bracy as an ally, Mr Sanz-Paris was keen to distance himself from some of Mr Bracy's activities and suggestions. To some extent, I would accept that he was right to do so. However, I consider that he knew more about the relationship between Mr Bracy and Messrs Senf and Blatz than he was prepared to accept. For example, he was privy to the suggestion that Value Partners would promote UBS GAM as portfolio manager in return for payment which he described as merely ``cheeky'' (see [214] below); he was a recipient of Mr Maron's list of potential clients to be approached by Value Partners and must have understood the inappropriateness of what was proposed (see [190] below); he was aware that the scandal surrounding Mr Heininger in October 2006 was the result of gifts made by Messrs Senf and Blatz but told others within UBS that they were irrelevant (see [469] below); despite this, he attended the South Africa safari with Mr Bracy and Messrs Senf and Blatz in late October 2006 at which this scandal must have been discussed (see [469] below); and he was responsible for (but claimed to have forgotten) the ``transaction overview'' document produced in November 2006 in which the amount of the Balaba STCDO premium was not stated and which misleadingly implied that the fact that this premium was sufficient to cover the cost of the single name CDS was merely an incidental benefit of the transaction (see [471] below). All this suggests that he either knew that there were things which were seriously wrong with Value Partners or at any rate that he deliberately turned a blind eye to that possibility because he did not want to know.

  83. I consider that Mr Sanz-Paris's evidence must be viewed with caution.

    Mr Bryon Lancaster

  84. Mr Lancaster was a relatively junior member of the structuring team who was chiefly responsible for ensuring that the transactions were properly documented. He was the member of the deal team who was primarily concerned with the legal opinion provided to UBS by Freshfields which dealt (among other things) with the issue of KWL's capacity, although UBS's internal legal department and also Allen & Overy were also involved in reviewing this. Mr Lancaster was an honest witness, doing his best to assist within the inevitable limits of memory when speaking about events which took place for the most part eight years ago. He was prepared to make appropriate admissions. Indeed, some of the admissions which he was prepared to make under skilful cross examination went too far. For example, he agreed that it was likely that UBS had at some point obtained a copy of the Freshfields advice to KWL when it is clear, in my judgment, that this never happened (see [293] below). He admitted also that the Freshfields capacity opinion provided to UBS was equivocal on the issue of whether Supervisory Board approval for the transaction was needed. I shall need to consider that opinion further in due course, but this was not how UBS or Mr Lancaster saw the matter at the time.

    Mr Paul Czekalowski

  85. Mr Czekalowski was head of the structuring team at UBS and was less closely involved in the detail of the transaction than Mr Bracy, Mr Sanz-Paris and Mr Lancaster. He was an aggressive banker, hungry for the next deal, impatient with those who stood in its way or who were not prepared to move at the speed which he desired, and ready to cut others out of a deal if that would maximise his own reward. His attitude is perhaps summed up in the contrast between two e-mails which he sent, one to Mr Bracy in January 2007 (``Wots the scoop on the VP railway lease portfolio, big guy? Hungry, hungry ...'') and the other, only a few weeks later, in which he argued that Mr Bracy and his group should be excluded from remuneration for any future Value Partners' work (``I don't count VP in this 25/50% arrangement since Oscar and I's direct relationship is perfectly adequate (probably better than Steve's in the sense that they come to us to actually get stuff done ... They call Steve to go for beers)'').

  86. Mr Czekalowski provided some useful insight into UBS's approach to STCDO counterparties, but much of his evidence was more in the nature of reconstruction than actual recollection. For example, he could not remember (nor could any other witness and the documents do not indicate) whether he had attended part (and if so, which part) of the 9 May 2006 meeting at which KWL says that a number of misrepresentations were made, although if he was there, it is likely that as the leader of the UBS team he would have been doing much of the speaking.

    Ms Jeanne Short

  87. Ms Short was and is a senior figure in CRC. She was an impressive witness who gave entirely frank evidence. I have already described her reaction on learning, in some cases for the first time in the witness box, what Mr Bracy had been up to. Her ready agreement that the transaction with KWL was seen within UBS at the time as increasing risks for KWL and that it was for precisely that reason that she was concerned about its suitability (see [154] below) provided a refreshing contrast with the reluctance of other UBS witnesses to acknowledge this.

    Mr Sunil Dattani

  88. Mr Dattani was in many ways a candid and engaging witness, but his evidence did not inspire confidence in his ability as a portfolio manager. Although experienced in structured finance, before joining UBS in October 2004 he had no experience in managing a portfolio of reference names in a CDO. The Balaba STCDO portfolio was only the second CDO which he had ever managed. It is therefore surprising that he was left to manage these STCDO portfolios, which had a combined value of several hundred million dollars, with no real supervision by anyone else with appropriate experience. Rather he was left to seek assistance if he thought it was necessary but this, as he explained, did not happen very often. Indeed, on at least one occasion, in August 2007, he was reluctant to have a discussion with credit analysts about some of the financial entities in the KWL portfolios when one of his superiors, Mr van Klaveren, suggested that he should. That may have proved to be an expensive mistake. It is now the main thrust of KWL's complaint that the portfolios were far too heavily exposed to financial entities.

    KWL witnesses

    Dr Andreas Schirmer

  89. Dr Schirmer was one of KWL's two managing directors, the other being Mr Heininger. KWL submits that Dr Schirmer was ``an obviously honest and thoughtful witness''. I did not find him to be so. Rather, he was an unreliable and in important respects untruthful witness. I understand that he still faces the possibility of criminal proceedings in Germany. Some aspects of his conduct demonstrate a serious dereliction of his duty as a managing director of KWL. I mention the following matters.

  90. First, it was Dr Schirmer's evidence that KWL's decision to conclude the STCDOs was discussed at, and should therefore have been recorded in the minutes of, KWL's management meetings. These were meetings which took place at least monthly, attended by the two managing directors and the heads of KWL's various departments. The minutes were only disclosed by KWL after Dr Schirmer had given this evidence. They contained no reference to any such discussion.

  91. Second, Dr Schirmer's evidence in this action and to the German prosecution authorities was that he was advised by Freshfields in May 2006, in person and in writing, that it was unnecessary for KWL to obtain the prior approval of its Supervisory Board for the STCDO transactions and that notification after the event would be sufficient. But this cannot be right. Freshfields' 26 May 2006 letter of advice to KWL stated very clearly that whether prior Supervisory Board approval was required was an open question and said nothing about subsequent notification (see [133] below). If Dr Schirmer read the advice as he claimed, he signed the transaction documents knowing that there was no Supervisory Board approval in place, despite the advice which Freshfields had given. This would have been seriously culpable. It is more likely that he never bothered to read the advice and that his evidence that he had was untrue.

  92. Third, on or about 14 June 2006 Dr Schirmer, with Mr Heininger, signed an engagement letter which was dated 31 May 2006, under which Value Partners became entitled to any amount of the ``interest rate advantage'' to be earned by KWL from the transaction in excess of €4.5 million. At the time this letter was signed, the net proceeds for the Balaba transaction were already known to be US $21.1 million. Even if Dr Schirmer did not know this (which he probably did not) he was grossly negligent not to inquire when his evidence was that the purpose of the transactions was to raise funds for KWL. The result was that KWL had agreed to sign away the majority of the proceeds from the Balaba transaction and was in effect giving up all proceeds from any future transactions. Faced with this, Dr Schirmer's reaction in cross examination was to deny having signed the letter. This was obviously untrue. The document bears what certainly appears to be his signature. He had never before denied having signed it and KWL had never contested the authenticity of the document or of Dr Schirmer's signature.

  93. Fourth, in circumstances described at [320] to [322] below, Mr Heininger agreed with UBS to notify the KWL Supervisory Board of the Balaba transaction at the board's next meeting in September 2006. However, instead of using the presentation which UBS had provided, Mr Heininger used his own highly misleading presentation, which he gave twice, once to KWL's Finance and Construction Committee, and once to the Supervisory Board itself. Dr Schirmer was present at both meetings. His evidence was that he did not concentrate on Mr Heininger's presentation, because he was focussed on two subsequent agenda items for the Supervisory Board, in particular on one relating to an increased project budget for which he was responsible. I do not accept this. I find that Dr Schirmer was content to allow Mr Heininger to mislead the board.

  94. In late October 2006, Mr Senf and Mr Blatz organised and attended a safari to South Africa, accompanied by Mr Bracy and Mr Sanz-Paris. KWL placed some emphasis on this trip as evidencing a corrupt relationship between Value Partners and UBS, on the basis that nobody from KWL was invited. In fact, it is clear that Mr Heininger and Dr Schirmer were invited and were expected to attend. On 13 September 2006 Mr Heininger told a friend, Martina Konz, that he was going to ``travel for a few days with a couple of friends (the usual ones) to South Africa at the end of October''. Two days later, he emailed Dr Schirmer to say that he had arranged an appointment for them both for vaccinations against hepatitis A, typhoid and malaria. Dr Schirmer denied being invited to South Africa, or any knowledge of such a trip, but that denial is not credible.

  95. In fact it is clear why Mr Heininger and Dr Schirmer pulled out of this trip at a late stage. It was because of a scandal which had erupted in the Leipzig press concerning allegations of inappropriate trips to stay in a luxury hotel in Dubai (Mr Heininger and others, but not Dr Schirmer) and a 2002 trip on Concorde (Mr Heininger and Dr Schirmer), paid for in both cases by Mr Senf's and Mr Blatz's former company, Global Capital Finance. Others in Leipzig were also said to be implicated. These allegations were being investigated by accountants appointed by the KWL Supervisory Board. In those circumstances, to go on a luxury safari paid for by Value Partners would not have been politic.

  96. Fifth, when those allegations erupted in October 2006 Dr Schirmer lied about the reason for the Concorde trip, claiming in a press conference that it had been necessary in order to arrive in New York in time for contract negotiations and signature. This...

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