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UBS Banker in Swap Deal Arranged for Strippers, Utility Says

By Andrea Gerlin and Kit Chellel
May 19, 2014 7:04 AM EDT 31 Comments

A German water utility alleged a former UBS AG (UBSN) banker had an “inappropriate” relationship with consultants advising on disputed swap deals, the latest lawsuit to highlight how complex financial instruments backfired on municipal agencies during the 2008 financial crisis.

Kommunale Wasserwerke Leipzig GmbH said in court documents that Steven Bracy, the banker at the center of the allegations, booked strippers for consultants at Swiss firm Value Partners and went on an African safari with them. That happened even as KWL was negotiating on its derivative transactions with UBS.

KWL made the allegations in its response to a lawsuit filed by UBS, in which the bank is seeking $138 million under so-called credit protection agreements from 2006 and 2007. The utility argues in court documents that the close relationship between the bank and the consultants creates a conflict of interest that invalidates the deal. Bracy is scheduled to testify at the trial in London today.

“All these exchanges show that there was a mutually dependent relationship that developed between Value Partners and UBS,” Timothy Lord, a lawyer for KWL, said at the beginning of the trial in London last month.

The case is one of dozens in London courts over financial products designed to hedge risks that backfired on customers, often municipal agencies and small companies, during the 2008 financial crisis.

‘Luxury Safari’

Bracy, then a UBS employee, “appears” to have asked another man in 2006 to arrange for four strippers to be paid $5,600 each, KWL said in court documents. Later that year, Value Partners invited Bracy and another UBS employee to go on a “luxury safari” in South Africa to discuss a further business opportunities.

While the company was identified in court documents only as Value Partners, Swiss corporate filings indicate the full name was Value Partners Associates AG.

Deals with the utility led to German bribery convictions for the consultants, Juergen Blatz and Berthold Senf, over allegations that began before UBS’s involvement.

During his testimony today, Bracy said he had been interviewed by the U.S. Securities and Exchange Commission about the KWL deal for two days in September.

UBS said in court documents that the deal, where the two parties bought and sold credit protection in complex financial transactions that included a single-tranche collateralized-debt obligation, was intended to “diversify” KWL’s risk from prior loans and to generate cash. KWL says the deal increased its risk and left the utility exposed to more than 300 million euros ($411 million) of liability.

Value Partners

A lawyer for UBS, Charles Falconer, told the court in April that written agreements show Value Partners was advising KWL on the transaction.

“There was never any doubt in anyone’s mind that Value Partners were acting for KWL,” he said. “Attempts by Value Partners during the course of the transactions to blur the line were rebuffed by UBS.”

Falconer said UBS didn’t force KWL to accept the deal and any blame was with the water supplier and its former managing director, Klaus Heininger. Heininger was convicted by a German court of accepting more than $3 million in bribes from Blatz and Senf beginning in 2005.

Heininger was sentenced to more than seven years in prison. Senf and Blatz received prison terms of five years and four years and two months. All three appealed, according to Ralf Hoegner, a spokesman for the court in Dresden, Germany.

Frank Viereckl, a spokesman for KWL, declined to comment.

‘Unfounded Allegations’

UBS said earlier in the trial it was simply seeking the money it was owed.

“UBS considers the allegations made by KWL in the litigation that it is not obliged to make any payment to UBS to be unfounded,” the Zurich-based bank said in a statement.

The strippers and safari weren’t the only gifts allegedly exchanged between UBS and Value Partners. The bank gave tickets to the World Cup soccer quarter-finals in Berlin in 2006 to Blatz and another person at Value Partners, and watches and suitcases to Blatz and Senf later that year, the bank said in court documents. The bank says the gifts were “normal” in the industry, unsolicited, too minor to breach fiduciary duties and not given surreptitiously.

UBS said in court documents that KWL officials were invited on the safari and then decided not to attend. The bank also said that it paid for its bankers’ flights, while Value Partners paid for the accommodation, and “the entire trip was vetted” by UBS’s compliance team. A spokeswoman for the lender declined to comment on the allegations about strippers and the safari.

Bracy apologized after the evening with strippers. He e-mailed Senf and Blatz the morning after offering to pay them $7,100 of his own money, according to KWL’s court documents. “Sorry about last evening,” he said in the e-mail.

False Expenses

Bracy, who was based in New York and left UBS in 2008, was later penalized in the U.S. on a separate matter. He agreed not to associate with any member of the U.S. Financial Industry Regulation Authority after he was investigated for submitting false expense reports while at UBS and his subsequent employer, Ross, Sinclaire & Associates in Columbus, Ohio, according to a November Finra ruling.

Bracy left Ross, Sinclaire & Associates about three months ago, according to the firm.

The case is UBS AG v Kommunale Wasserwerke Leipzig GmbH, case no. 10-50, U.K. High Court of Justice, Queen’s Bench Division.

To contact the reporters on this story: Andrea Gerlin in London at agerlin@bloomberg.net; Kit Chellel in London at cchellel@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net Lindsay Fortado, Mark Bentley

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