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...

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