The WSJ Law blog includes this post yesterday that illustrates the virtues of e-discovery and the ever-expanding use of tort law in claims between businesses. The post, by Ashby Jones, reports on and includes a link to a Connecticut opinon in which the buyer of cdos sued the seller (UBS) for fradulent concealment of material facts regarding an impending downgrade of the rating for the cdos. The post includes a link to the trial judge’s nicely written opinion granting a motion for prejudgment secuurity for about $ 35 million. The opinion lays the facts that caused the judge to grant the motion, and relies in material part on quotes from various internal e-mails at UBS in which the securities were internally disparaged at UBS – before sale – as “crap” and “vomit.”
The entire post and opinion make for an easy read for those interested in the litigation arising out of the recent financial fiascoes. For those who are not inclined to scan it all, here’s a key quote that illustrates why paying for e-discovery can be worth it and why tort claims are seeing increasing use in litigation between businesses:
“But the court finds there is more to this case than that. Through direct and circumstantial evidence, Pursuit has established probable cause to sustain the validity of a claim that the UBS defendants were in possession of material nonpublic information regarding imminent ratings downgrades on the Notes it sold to the Plaintiffs, information UBS withheld from the Plaintiffs.
The use of the term “triggerless,” which was used by UBS to entice the Plaintiffs to purchase the same Notes they had earlier rejected, is akin to a representation by UBS that a gun being handed to the Plaintiffs is not loaded, when in fact UBS knew the gun was not only loaded, but was about to go off. The court takes UBS employees at their word when they referenced their Notes, these purported “investment grade” securities which they sold, as “crap” and “vomit”, for UBS alone possessed the knowledge of what their product, their inventory, was truly worth. While UBS would argue that such descriptors lack a precisemeaning, the true meaning of these words and the true value of UBS’s wares becameabundantly clear when the Plaintiffs’ multi-million dollar investment was completely wiped out and liquidated by UBS shortly after the last of the Note purchases was consummated.
That is the difference between a risk that something might happen to change the value of an investment, which is both a fact of life and a risk shared by all parties to any securities transaction, and the undisclosed knowledge that something will happen. That type of nondisclosure, whether it is on the part of a seller or a buyer, can cross the line into actionable securities fraud, and the court finds probable cause to sustain a finding that in this instance, it did. “