UBS and Pension Plans to Do Battle in Washington
(CN) - The Supreme Court agreed Monday to review complaints by UBS investors over the lack of clarity in the standard for appellate review of shareholder derivative actions.
A pension plan for state employees of Puerto Rico and another such plan had sued the Swiss financial giant in 2010, claiming that UBS seized upon unique aspects of the island's financial markets to engage in a scheme that netted it millions in wrongly assessed fees.
"Operating on all sides of mutual fund and bond transactions, the UBS defendants manipulated the funds and bond market to the detriment of the funds and its unsuspecting investors," their complaint stated.
In the most egregious example of these activities, UBS allegedly became financial advisor to the Employee Retirement System of the Government of Puerto Rico, and then served as underwriter when the pension fund sold $2.9 million in bonds.
Despite the fact the bonds were of low quality and rated just one step above junk, UBS garnered $27 million in fees for itself and its underwriters, according to the complaint.
Compounding the situation, UBS was also buying the bonds and including them in investment funds held by the pension group, an action that significantly eroded the value of those funds, the plans said.
U.S. District Judge Aida Delgado-Colon dismissed the plans' case without prejudice, however, on the grounds that the plans failed to make a pre-suit demand on the fund's board of directors to investigate and rectify the situation.
The plans also failed to state why they believed such a demand would have been futile, according to the ruling.
Delgado-Colon then barred the plans from filing an amended complaint.
The case shines a spotlight on a particularly contentious are of corporate law - the extent to which a shareholder derivative suit should allowed to sue managers and directors.
Typically, a shareholder may file a derivative suit on behalf of the corporation when they have asked the board to address a wrong, but the board has failed or refused to do so. The vast majority of jurisdictions allow an exception to the demand rule where the shareholder asserts the demand would have been futile because the company directors themselves or a majority thereof, are the wrongdoers.
A three-judge panel of the 1st Circuit gave the plans another shot after a lengthy review of the many opinions on what standard of appellate review should be employed.
Here, the plans had established with "sufficient particularity a reasonable doubt about the ability of the six directors identified above to evaluate plaintiffs' demand to bring this action on behalf of the funds," Judge Kermit Lipez wrote for the court. "Because the board of directors of the funds have eleven members, plaintiffs have established under Rales that a pre-suit demand would have been futile," Lipez added, citing the 1993 decision by the Delaware Supreme Court.
In its petition for certiorari, UBS went straight to the standard-of-review issue, noting that in this case the 1st Circuit held de novo review was appropriate, when the 2nd, 3rd, 7th, 9th, 10th, 11th and D.C. Circuits have all applied an abuse of discretion standard to a district court's assessment of the particularized allegations that would excuse the shareholder from making a pre-suit demand for board action.
The Supreme Court took up the case Monday without issuing any comment, as is its custom.