A Hawaiian thrift is suing UBS PaineWebber Inc. for more than $4 million, claiming it should have known better than to recommend a class of securities that regulators later ordered the thrift to sell at a loss.
Honolulu-based American Savings Bank says PaineWebber advised it to purchase about $84 million worth of collateralized debt obligations in 1999 and 2000.
The suit was filed in February in Hawaiis First Circuit Court. The $6 billion-asset thrift said its similar lawsuit against First Union Corp. is close to settlement.
Collateralized debt obligations are a class of investments consisting of pools of securitized commercial loans, bonds, or both. Regulators permit thrifts to hold some of these securities, but not the riskiest ones, which were the kind that PaineWebber had offered to the thrift.
But American Savings claims that PaineWebber, which the Swiss banking giant UBS AG bought in November assured it that regulators would approve its purchase of the securities because of the way the transaction was structured.
According to the suit, PaineWebber planned to place the securities in trusts, with a guarantee that the principal on American Savings investments would ultimately be returned. With this guarantee in place to mitigate the risk, PaineWebber allegedly assured the thrift that regulators would approve the investment.
However, last June the Office of Thrift Supervision informed the thrift that the certificates were not eligible investments and ordered it to dispose of them. On March 23, the thrifts parent, Hawaiian Electric Industries Inc., said in its annual report that American Savings was taking steps to get rid of the securities by the end of the second quarter, and that it expected to realize at least a $3.8 million loss.
American Savings is seeking to recover that anticipated loss as well as legal fees and additional damages.
According to the lawsuit, PaineWebber impliedly warranted that the trust certificates they recommended, offered, and sold to American Savings in fact were eligible for purchase by a federally regulated thrift institution.
Neither side would discuss the lawsuit, but one expert shuddered at American Savings Banks assertion that the brokers warranted their recommendations.
The implication of that is scary, because they are trying to place the burden [of knowing what regulators will allow] on the selling agents, said James Bradshaw, a senior analyst at D.A. Davidson & Co. in Portland, Ore.
Its difficult for sellers to know the complicated rules established by bank regulators and what constitutes an appropriate investment for banks, he said.
American Savings sued First Union for selling it about $30 million of the same type of collateralized securities in 1999 and 2000. According to Hawaiian Electrics annual report, First Union is expected to settle with the thrift by Tuesday for an amount approximating American Savings original purchase price of the trust certificates. First Union also refused to discuss the case.
As for the OTS, a spokesman said it recommends that financial institutions and their brokers both ensure that their transactions will pass muster with regulators.
Both parties in a transaction have a responsibility to know the rules, the spokesman said. Any thrift is welcome to call the OTS if they have questions about a transaction at any time.
