Neutral Citation Number: [2014] EWHC 3615 (Comm)
Case No: 2010 Folio 50
2010 Folio 1224
2010 Folio 500
2010 Folio 505
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 04/11/2014

Before :

THE HONOURABLE MR JUSTICE MALES
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Between :
Case No: 2010 Folio 50
2010 Folio 1224

	(1)	UBS AG (LONDON BRANCH)
(2)	(2) UBS GLOBAL ASSET MANAGEMENT (UK) LTD	
Claimants	
	- and -		
	KOMMUNALE WASSERWERKE LEIPZIG GMBH
- and -
(1)	UBS LIMITED
(2)	DEPFA BANK PLC	Defendant

Third Parties	
			
And Between :
Case No: 2010 Folio 500

	UBS LIMITED	Claimant	
	- and -		
	DEPFA BANK PLC
- and - 
KOMMUNALE WASSERWERKE LEIPZIG GMBH	Defendant

Third Party	

And Between :
Case No: 2010 Folio 505
	UBS AG (LONDON BRANCH)	Claimant	
	- and -		
	LANDESBANK BADEN-WÜRTTEMBERG	Defendant	
	- and- 
UBS LIMITED	
Third Party	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

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.

.............................

THE HONOURABLE MR JUSTICE MALES

TABLE OF CONTENTS	Para	
		
INTRODUCTION	1-4	
The transactions in outline	5-10	
The proceedings	11-13	
The principal claims and counterclaims	14	
The Balaba STCDO	15-20	
GECC, MBIA and Merrill Lynch single name CDSs	21	
The LBBW Back Swap	22-24	
The Depfa Back Swap	25-27	
The Depfa Front Swap	28-29	
The portfolio management claim	30-31	
		
THE CAST LIST	32	
UBS Investment Bank	33-34	
UBS’s top management	35	
The Credit Structuring Team	36-38	
Municipal Securities	39-40	
Debt Capital Markets	41-42	
Trading/hedging	43-45	
Control functions	46-47	
UBS GAM	48-49	
KWL	50-53	
Value Partners	53-56	
The external lawyers	57-58	
LBBW	59-61	
Depfa	62-64	
		
THE EVIDENCE		
Standard of proof	65	
Documents	66-69	
General approach to witnesses	70-72	
The UBS witnesses		
Mr Steven Bracy	73-81	
Mr Oscar Sanz-Paris	82-82	
Mr Bryon Lancaster	84	
Mr Paul Czekalowski	85-86	
Ms Jeanne Short	87	
Mr Sunil Dattani	88	
KWL witnesses		
Dr Andreas Schirmer	89-105	
The other KWL witnesses	106-107	
LBBW and Depfa witnesses	108-109	
		
THE STCDO TRANSACTIONS EXPLAINED	110	
The cross-border leases	111-113	
The single name payment undertakings	114-115	
The elements of the transactions in issue	116	
The Credit Default Swaps	117	
Single Tranche Collateralised Debt Obligations	118-123	
An example	124	
The KWL STCDOs	125-128	
UBS’s profit	129-134	
Increased or reduced risk?	135-140	
Premiums	141	
Ratings	142-149	
Spreads	150-153	
Overall	154-159	
		
DETAILED NARRATIVE	160	
The background to the parties’ initial discussions	161-170	
The 6 April 2006 conversation between Mr Bracy and Value Partners	171-181	
The arrangement between Mr Bracy and Value Partners	182-201	
Value Partners’ advice to KWL	202-204	
Initial discussions involving the London team	205-213	
Value Partners requests payment for recommending UBS GAM	214-218	
Mr Bracy’s view of the Value Partners relationship	219-224	
Preparation for the 9 May 2006 “kick off” meeting	225-227	
The 9 May 2006 meeting	228-246	
Mr Kraus’s German language presentation	247-250	
Beating up Mr Cox	251-258	
The shadow Standard & Poor’s rating	259-260	
The meeting with Wilmington Trust in New York	261-266	
Formal engagement of UBS and UBS GAM	267-268	
The Engagement Letter	269-271	
The Risk Disclosure Letter	271-275	
The Letter of Authority	276	
The internal credit approval process begins	277-284	
The 20 May 2006 due diligence meeting	285-297	
CRC declines the transaction	298-299	
Escalation of the approval decision	300-315	
Approval of the transaction	316	
The approval conditions	317-326	
Closing of the Balaba transaction	327-330	
The Freshfields capacity opinion	331-368	
Execution of the Balaba transaction	369-370	
Congratulations to Mr Bracy and further development of the Value Partners relationship	371-390	
KWL’s further engagement of Value Partners	391-392	
Value Partners’ visit to Mr Ryan	393-398	
Further Value Partners deals	399-406	
The search for an intermediary bank	407	
Discussions with LBBW	408-437	
KWL’s Supervisory Board meeting of 7 September 2006	438-444	
The expenses scandal	445-455	
The “letter for K”	456-466	
The safari	467-470	
The “transaction overview” document	471-477	
LBBW drops out	478-479	
Discussions with Depfa	480-516	
The Value Partners Introducing Agreement	517-519	
The collapse in the financial markets in 2008	520	
The termination of the Balaba single name CDS	521	
Potential restructuring	522	
Defaults to the Reference Portfolio and the termination of the STCDOs	523-528	
		
ABUSE OF THE POWER OF REPRESENTATION	529-530	
KWL’s constitution	531-533	
German law	534-547	
Was Supervisory Board approval required?	548-557	
Was shareholder approval required?	558-561	
Was there “gross negligence” by UBS in failing to appreciate the need for Supervisory Board (or other) approval?	562-576	
		
BRIBERY	577-586	
Bribery	587-588	
The bribery issues	589-590	
Was Value Partners the agent of UBS?	591-608	
Was payment of the bribe within the scope of the agency?	609-620	
		
CONFLICT OF INTEREST	621	
Conflict of interest – the law	622-624	
The conflict of interest issues	625-627	
Attribution – the law	628-635	
Attribution – the principles applied	636-641	
		
FRAUDULENT MISREPRESENTATION	642	
The representations	643-645	
Fraudulent misrepresentation – the law	646-648	
“Virtually risk free”	649-655	
“Reduction of risk through diversification”	656-667	
“Risk of default indicated by credit ratings”	668-674	
“Clear, fair and not misleading”	675-676	
		
UBS’S CLAIMS FOR BREACH OF WARRANTY AND MISREPRESENTATION	677-696	
		
BRIBERY AND CONFLICT OF INTEREST - REMEDY		
Rescission of the Balaba STCDO	697-708	
KWL’s claim for damages or an indemnity	709-716	
Consequences of the rescission of the Balaba STCDO	717-724	
The bribe paid to Mr Heininger	725	
The sums siphoned off by Value Partners	726	
Sums paid or payable to KWL under the single name CDSs	727-729	
Sums received by KWL and used to purchase additional subordination	730	
Conclusion	731	
		
RESCISSION OF THE DEPFA BACK SWAPS	732	
The representations relied upon	733-737	
Were the representations made?	738-739	
No knowledge of dishonesty	740-743	
No knowledge of taint	744750	
Were the representations false?	751-753	
Were the representations fraudulent?	754-772	
Contractual estoppel	773-784	
Reliance	785-786	
Consequences of rescission	787-794	
		
RESCISSION OF THE LBBW BACK SWAP	795-799	
		
THE DEPFA FRONT SWAPS	800-801	
Single transaction	802	
Agency	803-806	
Evident abuse	807-811	
Conclusion	812	
		
CONSTRUCTION OF THE LBBW AND DEPFA BACK SWAPS	813-814	
The purpose of clause 6	815-816	
The background	817-818	
The payment regime in the absence of Early Termination	819-827	
The payment regime in the event of Early Termination	828-834	
Conclusion	835	
		
RECTIFICATION OF THE BACK SWAPS	836	
Rectification and estoppel – the law	837-839	
The rectification sought by UBS	840-844	
Rectification of the LBBW Back Swap		
Credit risk	845-848	
Validity risk	849-852	
Rectification of the Depfa Back Swaps	853-857	
Entire agreement	858	
		
MISCELLANEOUS FURTHER CLAIMS	859	
Depfa’s claim for recovery of the payment made to UBS	860-861	
Return of collateral	862	
		
THE PORTFOLIO MANAGEMENT CLAIM	863-866	
The standard required by the Portfolio Management Agreements	867-875	
Breach	876	
A concentrated bet on financials	877-881	
Minimising risk or maintaining ratings?	882-885	
The Moody’s Metric	886	
The relevance of spreads	887-888	
Assessment of different market scenarios	889	
Quarterly reports	890-899	
No early exit strategy	900-905	
Conclusion on breach	906-907	
Causation and assessment of loss	908-910	
Conclusion	911	
		
OVERALL CONCLUSIONS	912	
The Balaba STCDO	913	
UBS’s damages claims	914	
Consequences of rescission as between UBS and KWL	915	
The Back Swaps	916-917	
Contingent conclusions	918	
Concluding observations	919-922	

Mr Justice Males : 

INTRODUCTION
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 Articles. The second is whether, if such approval was required, that requirement was so obvious to UBS that UBS’s failure to recognise it was (in short) grossly negligent.
b.	Whether the transaction was voidable on account of the bribery of Mr Heininger by Value Partners depends on whether for this purpose Value Partners is to be regarded as the agent of UBS. There is no doubt that, for most purposes, Value Partners was acting as the agent of KWL, with whom it had a pre-existing (and already corrupt) relationship. In principle, however, there would be nothing to prevent it from agreeing to act also as UBS’s agent, although that would put it in an impossibly conflicted position. It will therefore be necessary to examine whether there was a relationship of agency established between UBS and Value Partners and, if so, whether (albeit unknown to UBS) the bribe was paid within the scope of that relationship.
c.	Even if there was no such agency relationship, KWL contends that the dealings between UBS and Value Partners were such that Value Partners was subject to a conflict of interest which was known to UBS and to which KWL did not consent, and that the STCDO was voidable on this ground. Under this heading it will be necessary to consider whether there was such a conflict, whether UBS was aware that Value Partners was not giving disinterested advice to KWL and, if so, whether KWL gave its informed consent to that situation.
d.	Finally, KWL contends that the Balaba STCDO was voidable for fraudulent misrepresentation by UBS. The principal representations alleged to have been made by UBS concern the effect of the STCDO – that it would be virtually risk free for KWL and/or would represent a reduction in the risks to which KWL was exposed. It will therefore be necessary to consider (among other things) whether such representations were made, whether they were made dishonestly and, if so, whether they were relied on by KWL in deciding to enter into the STCDO.
e.	In addition to its contention that the Balaba STCDO was voidable by reason of bribery, conflict of interest and misrepresentation, KWL contends that it is entitled to damages from UBS by reason of such matters, including damages comprising any sums which it is held liable to pay to LBBW or Depfa under the LBBW and Depfa Front Swaps.
17.	In the alternative to its claims to enforce the Balaba STCDO directly, UBS seeks an equivalent sum from KWL by way of damages for breach of warranties and representations made in some of the other documents connected with the transaction which were signed by KWL. These were broadly to the effect that KWL was entering into the transaction in good faith and in the ordinary course of business, that it had obtained all necessary approvals, that it would assess the risks of the transactions for itself and that it was not relying on UBS for investment advice or recommendations.
18.	KWL contends that these alternative claims stand or fall with UBS’s claim under the STCDO so that if the STCDO is void or has been avoided, these ancillary claims can have no independent life, while if UBS’s claim under the STCDO succeeds, these claims add nothing.
19.	In the event that the Balaba STCDO is held to be void or to have been avoided, UBS claims the return of the premiums paid under each of the STCDOs.
20.	UBS also seeks the return of the £3.3 million paid to KWL on the unwinding of the Balaba CDS in September 2008.
GECC, MBIA and Merrill Lynch single-name CDSs
21.	KWL claims US $66,916,676 from UBS, being the sum due to it on the Early Termination of the GECC, MBIA and Merrill Lynch single-name CDSs which were “in the money” for KWL.
The LBBW Back Swap
22.	UBS seeks to recover from LBBW €75,473,025, being the sum which it claims to be due on the Early Termination of the LBBW Back Swap. 
23.	LBBW resists that claim, contending that the LBBW Back Swap has been validly rescinded for misrepresentation by UBS. The representation on which it principally relies is that UBS believed Value Partners and Mr Heininger to be honest, when in fact it knew that they were not. The principal issue here is whether for this purpose the knowledge and intention of a UBS employee called Steven Bracy is to be regarded as that of UBS. 
24.	Alternatively, LBBW contends that on an Early Termination of the STCDO its only liability to UBS is to pay what it is actually paid by KWL (which so far is nothing). In the further alternative it says that it is under no liability to UBS in the event that the LBBW Front Swap is held on KWL’s appeal in Germany to be void or to have been avoided.
The Depfa Back Swaps
25.	UBS seeks to recover from Depfa US $83,342,278, being the sum which it claims to be due on the Early Termination of the Depfa Back Swaps, Depfa having already paid US $32,606,699.31 to UBS.
26.	Depfa resists that claim, contending that the Depfa Back Swaps have been validly rescinded for misrepresentation by UBS. Like LBBW, the representation on which it principally relies is that UBS believed Value Partners and Mr Heininger to be honest.
27.	Alternatively, Depfa contends that it is under no liability to UBS in the event that the Depfa Front Swaps are held to be void or to have been avoided. It seeks to recover the payment which it has already paid to UBS as money paid under a mistake.
The Depfa Front Swaps
28.	Depfa seeks to recover US $116,025,971 from KWL which it claims to be due on the Early Termination of the Depfa Front Swaps. This claim is contingent on Depfa being held liable to UBS on the Back Swaps.
29.	KWL resists this claim, essentially on the same grounds as it resists UBS’s claim under the Balaba STCDO, contending that for this purpose the conduct and knowledge of UBS are to be attributed to Depfa and, in addition, that Depfa was itself grossly negligent in failing to recognise the need for prior approval of the transaction by KWL’s Supervisory Board.
The portfolio management claim
30.	In the event that the Balaba STCDO, the LBBW Front Swap or the Depfa Front Swaps are binding on KWL, KWL seeks to recover damages from UBS GAM for the negligent management of the STCDO portfolios.
31.	These claims and counterclaims will require further explanation, but this summary should be sufficient to set the scene.
THE CAST LIST
32.	I now introduce the principal participants in these transactions. Those whose names are italicised when first mentioned gave oral evidence at the trial. Most of the UBS witnesses are no longer employed by UBS. Those relatively few whose names are underlined when first mentioned are still UBS employees. 
UBS Investment Bank
33.	The claimants are UBS AG, a bank incorporated in Switzerland, and UBS Ltd, an English subsidiary of UBS AG. It is unnecessary to distinguish between them. It is, however, necessary to distinguish between UBS’s role as an investment bank and its role as a portfolio manager, which was carried out by UBS Global Asset Management (UK) Ltd. I shall therefore refer to the investment bank as “UBS” and to the portfolio manager as “UBS GAM”. 
34.	UBS was and is regarded as a blue chip investment bank although, like many financial institutions, it had to be bailed out during the financial crisis of 2008-9. This appears to have been the result, at least in part, of disastrous trading in CDOs for UBS’s own account.
UBS’s top management
35.	The Chief Executive Officer of the investment bank during this period was Huw Jenkins and the Global Head of Fixed Income was Simon Bunce. Chris Ryan was the Global Head of Credit Fixed Income. These were very senior individuals who became involved in overruling the refusal by UBS’s internal control function to approve the STCDO transaction with KWL. That proved to be a very bad decision. 
The Credit Structuring Team
36.	The structuring of the STCDO transaction (or, as they became, transactions) was primarily the responsibility of the Credit Structuring Team of UBS’s London branch. 
37.	Paul Czekalowski was head of Credit Structuring at the relevant time. He led a group from which a “deal team” would be drawn to work on individual transactions. In the case of the transaction with KWL, the deal team included (in addition to Mr Czekalowski) Oscar Sanz-Paris, Manish Mehta, Bryon Lancaster and Alexander Davies. Mr Sanz-Paris and Mr Mehta both had structuring roles, with Mr Sanz-Paris taking the main role in structuring the transaction, subject to Mr Czekalowski’s oversight. Mr Mehta was more junior and worked under Mr Sanz-Paris’s direction. He was primarily involved in the mechanics of the transaction and preparing drafts of presentation materials.
38.	Mr Lancaster and Mr Davies were both legally trained and, while not practising as lawyers, fulfilled a quasi-legal role in preparing and reviewing transaction documentation and liaising with UBS’s internal control functions. Mr Lancaster was the senior of the two, with Mr Davies being involved only when Mr Lancaster was unavailable.
Municipal Securities
39.	UBS’s Municipal Securities Group was part of UBS Securities LLC, a US-incorporated subsidiary of UBS AG. One of the Group’s employees was Steven Bracy, who had previously worked in the Global Lease Finance Group of Credit Suisse First Boston (“CSFB”). As a result of this experience Mr Bracy was well connected in the world of cross-border leasing and in particular knew Mr Senf and Mr Blatz of Value Partners, who had been his colleagues at CSFB in the period 1998-2000. Mr Bracy was not a structurer, but he was the point of contact between Value Partners and the UBS deal team.
40.	By 2006 the tax loophole which cross-border leases were designed to exploit was closed or closing. The market for new leases was therefore drying up. Mr Bracy was therefore looking for other opportunities for business for himself and the Municipal Securities Group. In his own words, he was anxious to “stay relevant” within UBS. Ultimately the Group was closed and Mr Bracy left UBS in June 2008. The evidence in this case shows that this was not a moment too soon.
Debt Capital Markets
41.	The Debt Capital Markets team (“DCM”) was a London based group within UBS responsible for marketing the capabilities and services of the bank in relation to bond issues and derivatives. One German member of DCM was Tilo Kraus. He was brought in to assist on the transaction with KWL when the deal team needed the assistance of a German speaker. 
42.	The head of DCM was Philippe Jordan, who had a somewhat strained relationship with Mr Czekalowski who felt that DCM was not doing enough to source work for Credit Structuring. Mr Jordan and Mr Bracy regarded each other with suspicion and dislike. Mr Bracy, like DCM, was playing a client relationship role and so saw DCM as unwelcome competition for his contacts and his remuneration. Mr Jordan viewed Mr Bracy as trespassing on his turf.
Trading/hedging
43.	The Structured Trading Desk was responsible for pricing and hedging the STCDO element of the transaction. As explained further below, UBS sought to remain “market neutral” under the STCDOs by itself selling credit protection which aimed to match, in market terms, that sold to it by KWL. This hedging in turn generated the revenue to fund the premium paid to KWL, UBS’s own costs and reserves, and its profit from the deal.
44.	Adam Johnson was the senior trader on the Structured Trading Desk responsible for the transaction. He worked with Credit Structuring to provide indicative pricing, and determined the level of hedging to be sold on each name in the portfolio on the trading date of each STCDO.
45.	UBS also sought to hedge its credit exposure to KWL, that is to say the risk that KWL would not pay if called upon to do so. This was the responsibility of the Derivatives Credit Exposure Management desk under Duncan Rodgers.
Control functions
46.	UBS’s internal processes required the transaction to be approved by various control functions of which Credit Risk Control (“CRC”) was the most important for present purposes. Because this was a large, complex and unusual transaction, it was designated as a “Transaction Requiring Prior Approval” (or “TRPA”) before it could be concluded. The primary concern of CRC was to make an assessment of the risk that a counterparty would default under a transaction and of what recovery might be made from it in that event. CRC would also consider the suitability of the transaction for the counterparty, although UBS’s internal policies made clear that the primary responsibility for this lay with the deal team.
47.	The Credit Officer assigned by CRC to the KWL transaction was Marcus Linfoot. He was then relatively junior. At a higher level within CRC was Jeanne Short, UBS’s Chief Credit Officer for Europe. She reported to UBS’s Chief Risk Officer, David Bawden. 
UBS GAM
48.	UBS GAM’s CDO management team was headed by a Portfolio Manager. From the commencement of the transaction until September 2008 this was Sunil Dattani, who then left UBS to join another financial institution in Singapore. He was succeeded by Paul Jong Woo, who was in turn succeeded in June 2010 by Michael Klene. Mr Woo provided a witness statement as did Mr Klene. Mr Klene was tendered for cross examination but KWL did not require him to be called.
49.	The Portfolio Manager was able to draw upon credit analysis performed by UBS GAM’s credit research team who also provided similar support to other teams within the Fixed Income Group. 
KWL
50.	Kommunale Wasserwerke Leipzig GmbH is a municipal water company based in Leipzig in what was formerly East Germany. Its business is to provide fresh water and sewage facilities to the City of Leipzig and the surrounding area. At the relevant time it was the fifth largest water and sewage utility in Germany. Its majority shareholder, with a 75% shareholding, is LVV Leipziger Versorgungs-und Verkehrsgesellschaft mbH (“LVV”), which in turn is owned by the City of Leipzig. Although ultimately in public ownership, KWL is incorporated as a private company (GmbH).
51.	At the relevant time, the Executive Board of KWL consisted of two managing directors, Klaus Heininger and Andreas Schirmer. Broadly speaking, Mr Heininger took the lead on commercial matters while Dr Schirmer dealt with technical matters. Others at KWL included Lutz Reichardt, the head of KWL’s finance department who visited UBS in September 2006 to sign some of the LBBW transaction documentation and Michaela Barth, then the head of KWL’s Executive Office who is now married to Mr Heininger. 
52.	KWL also had a Supervisory Board. This was the body whose function under German law was to provide oversight of the Executive Board’s activities. It was not itself an executive body, although KWL’s Articles required certain matters to be approved in advance by the Supervisory Board. Its members included trade union representatives and political appointees and it appears that it sometimes divided on party lines. No one on the Supervisory Board had any involvement with or knowledge of the transaction with UBS until (at the earliest) 7 September 2006, when Mr Heininger made a presentation to the board although it appears that even then board members did not appreciate that any transaction had actually been concluded. By that time the Balaba transaction with UBS and the GECC transaction with LBBW had already been concluded (although the latter only traded the following day). Three members of the board gave evidence, Andreas Müller, Holger Schirmbeck and Lothar Tippach. 
Value Partners
53.	Value Partners Group AG, a Swiss company, played an important role in the transaction. Precisely what that role was, and in particular whether Value Partners is to be regarded as the agent of UBS, KWL or both, is one of the principal issues in the case. Certainly Value Partners purported to act as KWL’s financial adviser, although KWL contends that it should be regarded as UBS’s agent. The key principals of Value Partners were Berthold Senf, Jürgen Blatz and Julian Cox. All three were former bankers. Mr Senf and Mr Blatz had been head of CSFB’s Global Lease Finance Groups for Switzerland and Germany respectively. Mr Cox had been a managing director at Bank of America. Before forming Value Partners, Messrs Senf and Blatz had worked at a company called Global Capital Finance. Although it would appear that not everyone at Value Partners was corrupt (in particular, it appears that Mr Cox was not), for the purpose of this case it is unnecessary to distinguish between Value Partners and Messrs Senf and Blatz.
54.	Value Partners and its principals had a history of working with KWL prior to the transactions in issue, Global Capital Finance having advised KWL in connection with its cross-border leases since 2003. In the course of this history, a corrupt relationship had developed between Mr Heininger and Messrs Senf and Blatz. It began with extravagant gifts and expenses paid luxury trips, but by April and May 2005 it had escalated to outright bribery, with a cash payment of €945,945 paid to Mr Heininger in connection with a cross-border lease concluded by KWL, together with a donation of €150,000 to the Leipzig football club which he supported. The corruption extended (unknown to UBS) to the transactions in issue in this case, with Mr Heininger, Mr Senf and Mr Blatz conspiring to extract the greater part of the upfront premium paid to KWL for their own personal benefit. To some extent this was notionally authorised by an engagement letter, dated 31 May 2006 but signed by Mr Heininger and Dr Schirmer on 14 June 2006, which purported to confer on Value Partners all proceeds of the transaction in excess of €4.5 million.
55.	All three of Messrs Heininger, Senf and Blatz have been convicted in Germany for a range of fraud, bribery, embezzlement and taxation offences. I understand that they are currently on bail.
56.	Apparently they have all expressed willingness to cooperate with KWL by giving evidence in this case, no doubt in the hope of receiving lighter sentences, but KWL decided not to adduce evidence from them. UBS submits that this must be because their evidence would have been unhelpful to KWL. It may very well be that it would have been. It seems to me, however, that the extent to which there would have been any real cooperation from these individuals is highly speculative and that it is not surprising that KWL would not have wished to rely on evidence from patently dishonest witnesses.  
The external lawyers
57.	UBS and KWL both engaged external lawyers to advise them in connection with the STCDO transactions. UBS instructed Allen & Overy while KWL instructed Freshfields Bruckhaus Deringer. As well as providing legal advice to KWL, Freshfields also provided legal opinions to UBS, LBBW and Depfa dealing (among other matters) with the question of KWL’s capacity to enter into the transactions. The partners at Freshfields handling the transactions were Claus Pegatzky, Frank Laudenklos and Daniel Reichert-Facilides of Freshfields’ Frankfurt office. 
58.	At least some of the advice provided by Freshfields to KWL is in evidence, as are some of Freshfields’ internal communications. However, UBS has claimed privilege (as it is entitled to do) for the advice provided to it by Allen & Overy and by its own internal legal department. 
LBBW
59.	LBBW is a German bank, the Landesbank for Baden-Württemberg, which in its role as an intermediary entered into separate back-to-back STCDOs with KWL and UBS.
60.	LBBW was keen to build up a CDO business and saw its role in this transaction as an opportunity to do so. Its Global Head of Credit Capital Markets was Mark Northway, who had overall responsibility for the deal. He had only recently joined LBBW, but had experience of CDO transactions from his previous work at Rabobank, including some intermediation transactions. He also had experience of dealing with municipalities. He was based in London, as was Gesine Schmidt, LBBW’s Head of Securitisations, who was the main LBBW point of contact with UBS.  
61.	Harald Müller, LBBW’s Director of the Structured Credit and Fund Derivatives desk, was based in Stuttgart. So was Falk Weishaupt, a lawyer in LBBW’s Legal International Business Department who was responsible for LBBW’s internal “legal sign off” on the LBBW transaction, although he was actually in New York for much of the relevant time.
Depfa
62.	DEPFA Bank Plc is a bank with German origins, although it moved its headquarters to Dublin for tax reasons. It specialised in lending to municipalities. During the financial crisis it was bailed out by the German government and is now owned directly or indirectly by the German state. It is currently in run off.
63.	In about mid 2006 Depfa established a new structured finance team headed by David Geoghegan who had previously worked in structured finance at various banks. Like LBBW, its role in the transaction was as an intermediary between UBS and KWL. It saw this as an opportunity to expand its public sector lending expertise into more specialised non-lending transactions with public sector clients.
64.	Most of the communications between UBS and Depfa went between Tarek Selim of UBS (although he did little more than pass on messages) and Ravi Gidoomal, a member of the structured finance team headed by Mr Geoghegan, who was Mr Gidoomal’s line manager. Fiona Flannery was head of Credit Risk Management and chaired Depfa’s credit committee at the relevant time. Burkhard Wiehler was a qualified (but fairly junior) German lawyer who at the material time was an in-house lawyer at Depfa with legal responsibility for the transaction. 
THE EVIDENCE
Standard of proof
65.	Although the standard of proof in civil proceedings is the balance of probabilities, many of the issues in this case involve allegations of serious wrongdoing. I bear in mind, therefore, what Lord Nicholls said in In re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563 at 586, as endorsed by the House of Lords in In re B (Children) [2008] UKHL 35, [2009] 1 AC 11: 
"The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence. …”
Documents
66.	There is a very substantial volume of documentary evidence, much of it in the form of contemporary emails and their attachments. There has been very extensive – and, I see no reason to doubt, full – disclosure from UBS and Depfa which for the most part provides a more or less comprehensive view of contemporary events as they unfolded. The disclosure from LBBW is probably less full, but that is largely due to the more limited scope of the issues affecting LBBW which arise for decision in this trial and the more limited scope of the disclosure which it was required to give as a result. 
67.	In addition to its documentary disclosure, including data from no fewer than 48 custodians, UBS and UBS GAM called oral evidence of fact from 14 witnesses (and tendered one more whose attendance, in the event, was not required). These included almost all those individuals who had a material involvement with the transactions in issue (but not Mr Ryan, although at one time UBS indicated that it intended to obtain evidence from him), despite the fact that most of the witnesses are no longer employed by UBS. In at least one important case (I refer to Mr Bracy) it must have been obvious to UBS that the witness’s evidence under cross examination was unlikely to advance its case and that the co-operation which the witness was prepared to give would be limited (despite his central role, Mr Bracy produced an initial witness statement of only eight pages). In my view there is force in the submission made by UBS that it has gone to considerable effort to ensure that a full picture of relevant events is before the court. For that it is to be commended.
68.	In contrast, documentary disclosure from KWL has been limited. Some important documents (which in some respects contradicted the evidence of KWL’s main witness, Dr Schirmer) were only disclosed during the trial after KWL’s witnesses had given evidence. KWL called only four witnesses, Dr Schirmer and three members of its Supervisory Board. Some potentially important witnesses were not only not called, but exercised rights which apparently they have under German law to refuse to permit disclosure of their emails. These included Mr Reichardt and Ms Barth (now Mrs Heininger). Ms Barth appears to have held KWL’s key archive of documents relating to the transactions, so her refusal to permit disclosure of her emails was particularly regrettable. It would seem likely that both of these, and others too, would have had relevant evidence to give and that, as a result of their refusal to allow disclosure, documents which might have thrown important light on the extent to which the transactions in issue and aspects of Mr Heininger’s relationship with Value Partners were (or for that matter were not) known about and understood within KWL have not been produced. Ms Barth, for example, was one of those who accompanied Mr Heininger and others on a luxury trip to Dubai, paid for by Global Capital Finance, in October 2003. 
69.	The consequence of this lack of disclosure and evidence from KWL has been twofold. First, there is no doubt that the picture which I have of events at KWL and the knowledge of various individuals is incomplete, although whether in important respects is difficult to say. Second, the sheer volume of material and the number of witnesses from the UBS side has inevitably meant that the main evidential focus of the trial (19 days in all) has been taken up with an intense scrutiny of the evidence of the UBS witnesses. I bear both these points in mind when making my findings of fact.
General approach to witnesses
70.	In making those findings I am principally guided by the contemporary documents and by the inherent probabilities of the case, judged as best I can in the light of the documents and my overall assessment of the witnesses. Inevitably, when giving evidence about events so long ago (for the most part in 2006 and early 2007), witnesses cannot be expected to have a detailed or accurate recollection of events, let alone of such matters as precisely who said what at particular meetings or what they knew at particular times. The usual difficulties of recollection (see Gestmin SGPA SA v Credit Suisse (UK) Ltd [2013] EWHC 3560 (Comm) at [15] to [22]) are aggravated in this case by the effect of hindsight. These were transactions which went so disastrously wrong that it is natural for witnesses to have persuaded themselves by a combination of hindsight and wishful thinking, in some cases perfectly honestly, that they did or said or thought things (or that they did not) at the time, or that they had less to do with the transactions than was in fact the case. There was also a tendency for some witnesses to be defensive about the role which they played and (in my view) to give evidence, not of what they actually did but of what they now wish they had done. Such evidence was not necessarily dishonest.
71.	With oral evidence from so many witnesses of fact (14 from UBS, four from KWL, five from LBBW and five from Depfa) it would be impracticable and of no real benefit to record detailed impressions about the reliability and truthfulness of each of them. I should, however, say something about some of the principal witnesses, in particular (but not exclusively) those I find to have been deliberately untruthful.
72.	I should also record that with so many witnesses and with four separate parties involved, it was necessary for the trial to proceed in accordance with a fairly tight timetable. Without this, the trial could easily have taken much longer. I am grateful to all parties for ensuring that the timetable was adhered to. I am satisfied that the time available afforded all parties a proper opportunity to put their respective cases. Nobody suggested otherwise. Inevitably, however, the need to work to such a timetable means that some avenues may not have been as fully explored in cross examination as they might otherwise have been. I have borne this in mind.
The UBS witnesses
Mr Steven Bracy
73.	Mr Bracy was a thoroughly dishonest man and dishonest witness. He had obviously been heavily coached (by his own lawyers who attended the trial during the four days when he gave evidence, not by UBS’s) and was highly evasive, refusing to give straight answers to simple questions. From a long list, four examples of his dishonesty will suffice.
74.	First, he deliberately deceived his colleagues at UBS, including the CRC, as to KWL’s credit rating, passing on an out of date shadow credit rating and suppressing a lower but more up to date rating in case the lower rating jeopardised approval of the deal (see [259] below). This alone was conduct for which, if it had come to light, other UBS witnesses said that he should have been fired. It shows the lengths to which he was prepared to go to promote the deal. 
75.	Second, there was clear evidence that Mr Bracy made a number of fraudulent expenses claims while at UBS. Although he failed to disclose this in his second witness statement, he has been barred from associating with any member of FINRA, the US financial regulatory authority, as a result of refusing to co-operate with an investigation into expenses frauds while at UBS and also while working for a later employer. In the event FINRA made no findings whether Mr Bracy was guilty of making fraudulent expenses claims, but the evidence before me made it abundantly clear that he was.
76.	Third, I have no doubt that Mr Bracy understood perfectly well that KWL’s priority in entering into these transactions was to obtain upfront cash, and that for this purpose it was prepared to accept some additional risk. That was made very clear to him in his dealings with Value Partners. However, he was concerned that to present this to CRC as KWL’s objective would be likely to result in approval being refused. He took steps to ensure, therefore, that the deal was presented to CRC as an exercise in risk reduction, for example by briefing Mr Heininger about the line which he should take when he met Mr Linfoot, a representative of CRC, on 30 May 2006. In the event, Ms Short and Mr Bawden refused to approve the transaction anyway, but this was nevertheless an attempt by Mr Bracy to mislead UBS’s own control function. For tactical reasons neither party emphasised this aspect of Mr Bracy’s evidence, UBS because it had no interest in further undermining his evidence and KWL because its case was that the purpose of the transaction was in fact to reduce risk and was represented to it as such by UBS. However, I have no doubt that this is in fact what happened. 
77.	Fourth, in what was described as the “letter for K” episode, when requested by Messrs Senf and Blatz in October 2006 to fabricate false evidence that a trip to Dubai to which they had treated Mr Heininger in 2003 had been for legitimate business purposes, he willingly co-operated (see [456] below). His evidence that he had merely pretended to co-operate, stringing Messrs Senf and Blatz along while hoping that the issue would go away, was quite obviously a pack of lies. The “letter for K” episode only emerged clearly in the course of Mr Bracy’s cross examination, although UBS has not denied that it was aware of this incident before his evidence began. It casts important light on the nature of Mr Bracy’s relationship with Value Partners. As I shall explain, he knew from the outset that Mr Senf and Mr Blatz were not acting in KWL’s best interests. In connection with the “letter for K” episode it appears to have come as no surprise to him that they were acting dishonestly to cover up an inappropriate relationship with Mr Heininger. His reaction to their request was not that of an honest man.
78.	These and other matters were not only put to Mr Bracy but also to Ms Short, an entirely honest and fair minded UBS witness. She was obviously horrified. The full extent of her reaction did not really appear from her answers on the transcript, frank as these were, so I put it to her in these terms, with which she agreed:
“MR JUSTICE MALES: To be blunt about this -- and you haven't, of course, seen all of the evidence in the case, or heard all of what Mr Bracy had to say about this -- but in your opinion, would it be fair to say that on the face of these emails, if we take the whole run of emails that you have been shown at face value, there was something of a rotten apple in the UBS barrel?
A. It's exactly what I would have said, yes.
MR JUSTICE MALES: It rather looked from the expression on your face as if that was what you were thinking.
A. Yes, precisely.
MR JUSTICE MALES: And I wanted to see if that was right.
A. Yes, indeed.”
79.	While I would not exclude the possibility that Mr Bracy may sometimes have given truthful answers, I conclude that no weight can be placed on his evidence save to the extent that it consists of admissions or is corroborated by the contemporaneous documents. When those contemporaneous documents were authored by Mr Bracy, as many of the important documents in the case were, I bear in mind also his tendency to boast about his achievements to his superiors and to exaggerate the importance of his own role. Messages of that kind cannot necessarily be taken at face value.
80.	Two further points concerning Mr Bracy are important. The first is that UBS expressly accepted in the course of its opening submissions that for the purpose of any question about what UBS knew or should have known, what Mr Bracy knew or should have known would count as the knowledge of UBS. At a later stage of the trial a question arose whether that acceptance covered issues arising out of the “letter for K” episode which gave rise to amendments of their pleadings by other parties after Mr Bracy had given evidence. I consider that it did not. Nevertheless the admission did apply (and is accepted by UBS to apply) to all issues on the pleadings as they then stood. These included in particular KWL’s agency/bribery, conflict of interest and misrepresentation defences (see [16] above) and UBS’s claim for damages for misrepresentation against KWL (see [17] above). Accordingly, any issue about the scope of UBS’s admission will only matter if the position of Mr Bracy was materially different in relation to the “letter for K” episode on the one hand and the other issues where it is accepted that his knowledge is to be regarded as the knowledge of UBS on the other. In my view his position was materially the same for all these purposes. I would add that the admission made by UBS as to the position of Mr Bracy was inevitable on the evidence which I heard.
81.	The second point is that at the pre trial review in this case an application by KWL to amend its pleading to allege that employees of UBS (principally Mr Bracy) knew of, or turned a blind eye to, the fact that Value Partners intended to misappropriate money for itself out of the upfront premium payable to KWL was refused, although KWL’s application to amend did not go so far as to allege that UBS knew that Mr Heininger was acting corruptly for his own benefit. KWL did not seek to appeal against that application or renew its application at the trial, even after the evidence about the “letter for K” episode emerged. In those circumstances it is not open to KWL to advance a positive case that UBS was aware, either that Value Partners intended to misappropriate money for itself or that it proposed to bribe Mr Heininger. Nevertheless the evidence about the “letter for K” episode does show beyond any possibility of doubt that Mr Bracy knew from September 2006 at the latest that Messrs Senf and Blatz were dishonest and in my judgment it is equally clear that it did not surprise him in the slightest that they were acting dishonestly to cover up an inappropriate relationship with Mr Heininger even if he was not aware of the precise respects in which it was dishonest. 
Mr Oscar Sanz-Paris
82.	Although described by Mr Bracy as an ally, Mr Sanz-Paris was keen to distance himself from some of Mr Bracy’s activities and suggestions. To some extent, I would accept that he was right to do so. However, I consider that he knew more about the relationship between Mr Bracy and Messrs Senf and Blatz than he was prepared to accept. For example, he was privy to the suggestion that Value Partners would promote UBS GAM as portfolio manager in return for payment which he described as merely “cheeky” (see [214] below); he was a recipient of Mr Maron’s list of potential clients to be approached by Value Partners and must have understood the inappropriateness of what was proposed (see [190] below); he was aware that the scandal surrounding Mr Heininger in October 2006 was the result of gifts made by Messrs Senf and Blatz but told others within UBS that they were irrelevant (see [469] below); despite this, he attended the South Africa safari with Mr Bracy and Messrs Senf and Blatz in late October 2006 at which this scandal must have been discussed (see [469] below); and he was responsible for (but claimed to have forgotten) the “transaction overview” document produced in November 2006 in which the amount of the Balaba STCDO premium was not stated and which misleadingly implied that the fact that this premium was sufficient to cover the cost of the single name CDS was merely an incidental benefit of the transaction (see [471] below). All this suggests that he either knew that there were things which were seriously wrong with Value Partners or at any rate that he deliberately turned a blind eye to that possibility because he did not want to know.
83.	I consider that Mr Sanz-Paris’s evidence must be viewed with caution. 
Mr Bryon Lancaster
84.	Mr Lancaster was a relatively junior member of the structuring team who was chiefly responsible for ensuring that the transactions were properly documented. He was the member of the deal team who was primarily concerned with the legal opinion provided to UBS by Freshfields which dealt (among other things) with the issue of KWL’s capacity, although UBS’s internal legal department and also Allen & Overy were also involved in reviewing this. Mr Lancaster was an honest witness, doing his best to assist within the inevitable limits of memory when speaking about events which took place for the most part eight years ago. He was prepared to make appropriate admissions. Indeed, some of the admissions which he was prepared to make under skilful cross examination went too far. For example, he agreed that it was likely that UBS had at some point obtained a copy of the Freshfields advice to KWL when it is clear, in my judgment, that this never happened (see [293] below). He admitted also that the Freshfields capacity opinion provided to UBS was equivocal on the issue of whether Supervisory Board approval for the transaction was needed. I shall need to consider that opinion further in due course, but this was not how UBS or Mr Lancaster saw the matter at the time.
Mr Paul Czekalowski
85.	Mr Czekalowski was head of the structuring team at UBS and was less closely involved in the detail of the transaction than Mr Bracy, Mr Sanz-Paris and Mr Lancaster. He was an aggressive banker, hungry for the next deal, impatient with those who stood in its way or who were not prepared to move at the speed which he desired, and ready to cut others out of a deal if that would maximise his own reward. His attitude is perhaps summed up in the contrast between two e-mails which he sent, one to Mr Bracy in January 2007 (“Wots the scoop on the VP railway lease portfolio, big guy? Hungry, hungry …”) and the other, only a few weeks later, in which he argued that Mr Bracy and his group should be excluded from remuneration for any future Value Partners’ work (“I don’t count VP in this 25/50% arrangement since Oscar and I’s direct relationship is perfectly adequate (probably better than Steve’s in the sense that they come to us to actually get stuff done ... They call Steve to go for beers)”).  
86.	Mr Czekalowski provided some useful insight into UBS’s approach to STCDO counterparties, but much of his evidence was more in the nature of reconstruction than actual recollection. For example, he could not remember (nor could any other witness and the documents do not indicate) whether he had attended part (and if so, which part) of the 9 May 2006 meeting at which KWL says that a number of misrepresentations were made, although if he was there, it is likely that as the leader of the UBS team he would have been doing much of the speaking.
Ms Jeanne Short
87.	Ms Short was and is a senior figure in CRC. She was an impressive witness who gave entirely frank evidence. I have already described her reaction on learning, in some cases for the first time in the witness box, what Mr Bracy had been up to. Her ready agreement that the transaction with KWL was seen within UBS at the time as increasing risks for KWL and that it was for precisely that reason that she was concerned about its suitability (see [154] below) provided a refreshing contrast with the reluctance of other UBS witnesses to acknowledge this. 
Mr Sunil Dattani
88.	Mr Dattani was in many ways a candid and engaging witness, but his evidence did not inspire confidence in his ability as a portfolio manager. Although experienced in structured finance, before joining UBS in October 2004 he had no experience in managing a portfolio of reference names in a CDO. The Balaba STCDO portfolio was only the second CDO which he had ever managed. It is therefore surprising that he was left to manage these STCDO portfolios, which had a combined value of several hundred million dollars, with no real supervision by anyone else with appropriate experience. Rather he was left to seek assistance if he thought it was necessary but this, as he explained, did not happen very often. Indeed, on at least one occasion, in August 2007, he was reluctant to have a discussion with credit analysts about some of the financial entities in the KWL portfolios when one of his superiors, Mr van Klaveren, suggested that he should. That may have proved to be an expensive mistake. It is now the main thrust of KWL’s complaint that the portfolios were far too heavily exposed to financial entities.
KWL witnesses
Dr Andreas Schirmer
89.	Dr Schirmer was one of KWL’s two managing directors, the other being Mr Heininger. KWL submits that Dr Schirmer was “an obviously honest and thoughtful witness”. I did not find him to be so. Rather, he was an unreliable and in important respects untruthful witness. I understand that he still faces the possibility of criminal proceedings in Germany. Some aspects of his conduct demonstrate a serious dereliction of his duty as a managing director of KWL. I mention the following matters. 
90.	First, it was Dr Schirmer’s evidence that KWL’s decision to conclude the STCDOs was discussed at, and should therefore have been recorded in the minutes of, KWL’s management meetings. These were meetings which took place at least monthly, attended by the two managing directors and the heads of KWL’s various departments. The minutes were only disclosed by KWL after Dr Schirmer had given this evidence. They contained no reference to any such discussion.  
91.	Second, Dr Schirmer’s evidence in this action and to the German prosecution authorities was that he was advised by Freshfields in May 2006, in person and in writing, that it was unnecessary for KWL to obtain the prior approval of its Supervisory Board for the STCDO transactions and that notification after the event would be sufficient. But this cannot be right. Freshfields’ 26 May 2006 letter of advice to KWL stated very clearly that whether prior Supervisory Board approval was required was an open question and said nothing about subsequent notification (see [133] below). If Dr Schirmer read the advice as he claimed, he signed the transaction documents knowing that there was no Supervisory Board approval in place, despite the advice which Freshfields had given. This would have been seriously culpable. It is more likely that he never bothered to read the advice and that his evidence that he had was untrue.
92.	Third, on or about 14 June 2006 Dr Schirmer, with Mr Heininger, signed an engagement letter which was dated 31 May 2006, under which Value Partners became entitled to any amount of the “interest rate advantage” to be earned by KWL from the transaction in excess of €4.5 million. At the time this letter was signed, the net proceeds for the Balaba transaction were already known to be US $21.1 million. Even if Dr Schirmer did not know this (which he probably did not) he was grossly negligent not to inquire when his evidence was that the purpose of the transactions was to raise funds for KWL. The result was that KWL had agreed to sign away the majority of the proceeds from the Balaba transaction and was in effect giving up all proceeds from any future transactions. Faced with this, Dr Schirmer’s reaction in cross examination was to deny having signed the letter. This was obviously untrue. The document bears what certainly appears to be his signature. He had never before denied having signed it and KWL had never contested the authenticity of the document or of Dr Schirmer’s signature.
93.	Fourth, in circumstances described at [320] to [322] below, Mr Heininger agreed with UBS to notify the KWL Supervisory Board of the Balaba transaction at the board’s next meeting in September 2006. However, instead of using the presentation which UBS had provided, Mr Heininger used his own highly misleading presentation, which he gave twice, once to KWL’s Finance and Construction Committee, and once to the Supervisory Board itself. Dr Schirmer was present at both meetings. His evidence was that he did not concentrate on Mr Heininger’s presentation, because he was focussed on two subsequent agenda items for the Supervisory Board, in particular on one relating to an increased project budget for which he was responsible. I do not accept this. I find that Dr Schirmer was content to allow Mr Heininger to mislead the board. 
94.	In late October 2006, Mr Senf and Mr Blatz organised and attended a safari to South Africa, accompanied by Mr Bracy and Mr Sanz-Paris. KWL placed some emphasis on this trip as evidencing a corrupt relationship between Value Partners and UBS, on the basis that nobody from KWL was invited. In fact, it is clear that Mr Heininger and Dr Schirmer were invited and were expected to attend. On 13 September 2006 Mr Heininger told a friend, Martina Konz, that he was going to “travel for a few days with a couple of friends (the usual ones) to South Africa at the end of October”. Two days later, he emailed Dr Schirmer to say that he had arranged an appointment for them both for vaccinations against hepatitis A, typhoid and malaria. Dr Schirmer denied being invited to South Africa, or any knowledge of such a trip, but that denial is not credible. 
95.	In fact it is clear why Mr Heininger and Dr Schirmer pulled out of this trip at a late stage. It was because of a scandal which had erupted in the Leipzig press concerning allegations of inappropriate trips to stay in a luxury hotel in Dubai (Mr Heininger and others, but not Dr Schirmer) and a 2002 trip on Concorde (Mr Heininger and Dr Schirmer), paid for in both cases by Mr Senf’s and Mr Blatz’s former company, Global Capital Finance. Others in Leipzig were also said to be implicated. These allegations were being investigated by accountants appointed by the KWL Supervisory Board. In those circumstances, to go on a luxury safari paid for by Value Partners would not have been politic.
96.	Fifth, when those allegations erupted in October 2006 Dr Schirmer lied about the reason for the Concorde trip, claiming in a press conference that it had been necessary in order to arrive in New York in time for contract negotiations and signature. This was not true. The different explanation which he gave in evidence, that the Concorde flight was necessitated by a religious holiday the previous day on which as a religious man he was reluctant to travel, was an explanation never previously advanced which did not make sense. The fact is that he did travel on the holiday in question, even if only as far as Paris.
97.	Together with Mr Heininger, Dr Schirmer deliberately misled the KWL Supervisory Board at its meeting on 8 November 2006 to review the result of the expenses investigation. They claimed that no further contractual relationships had taken place between “the involved parties” since October 2003. But that was thoroughly misleading in circumstances where they both knew that Messrs Senf and Blatz were being handsomely paid, in their new incarnation as Value Partners, for their role in connection with the Balaba and LBBW STCDOs and had invited them on a South African safari as a thank you.
98.	The fact that Value Partners had paid for Mr Heininger and Dr Schirmer to travel on Concorde in 2002 was not, in the overall scale of things, a matter of great significance in itself. But in the storm of excitement about this whipped up by the Leipzig press, Dr Schirmer clearly thought that it was. Instead of acknowledging that this had happened, he preferred to try and lie his way out of trouble and to cover up his and Mr Heininger’s other more recent dealings with Value Partners.
99.	By these means Mr Heininger and Dr Schirmer managed, just, to hang on to their jobs. But Dr Schirmer knew perfectly well that there was a close and continuing relationship between KWL and Messrs Senf and Blatz which included expensive treats like the safari trip, and that this had been successfully concealed from the Supervisory Board. Dr Schirmer must have realised from the lies told by Mr Heininger in which he had colluded that this relationship was highly inappropriate and had resulted in Mr Heininger becoming compromised, even though (as I accept) he did not know the full extent of Mr Heininger’s corruption. 
100.	Sixth, during late 2006 and 2007 there was a police investigation into Mr Heininger and Value Partners, which included a search for documents relating to transactions with Value Partners. This was a highly sensitive issue at KWL, although Mr Heininger remained in post. In addition, beginning in September 2007, Bettina Kudla, the Deputy Mayor for Finance of Leipzig and a member of the KWL Supervisory Board, began to ask questions about the performance of the single name bonds for which, unknown to her, KWL had purchased credit protection by means of the CDSs. Dr Schirmer was aware of these enquiries, but instead of the honest response, which would have been to explain that the risk of a default on these bonds had been removed by the purchase of the CDSs and replaced by the different risk under the STCDOs, he and Mr Heininger gave stalling and misleading replies. His explanation for this made no sense at all. It is clear that he continued to conceal the existence of the transactions from the Supervisory Board, most likely because acknowledging them would bring to light the lies he had told to the Supervisory Board in 2006. Even when the existence of the CDSs was finally admitted in 2008, there was no mention of the STCDOs or of the involvement of Value Partners. Ms Kudla followed up a reference to credit default insurance with further questions, in particular asking whether there were CDOs involved and whether KWL had received anything for entering into this insurance, but once again Mr Heininger and Dr Schirmer provided responses which were in part false and in other respects misleading. 
101.	By September 2009 the net was closing around Mr Heininger. The 2006 allegations about Global Capital Finance reappeared in the media, this time making the connection with Value Partners and suggesting that the Supervisory Board had been misled in November 2006, while KWL had also received a formal demand from its shareholder, LVV, for the “Terms of insurance of CDO/CDS transactions”. Mr Heininger realised that the game was up, and wrote to Dr Schirmer on 17 September 2009, asking “what are we going to do?”
102.	This had been a sustained and dishonest cover up by Mr Heininger in which Dr Schirmer co-operated fully.
103.	Seventh, Mr Heininger was indicted in October 2009 for corruption in connection with his dealings with Value Partners. Also in October 2009, Mr Heininger had approached KWL’s Supervisory Board and shareholders seeking approval for a transaction involving the replacement of the MBIA bond, to be funded through the sale of the MBIA CDS. The response of the Supervisory Board was to engage KPMG to provide an independent examination of the proposal. On 23 October, LVV wrote to Mr Heininger and Dr Schirmer to confirm KPMG’s engagement and asked them to cooperate in providing documents relating to both the cross-border leases and the UBS transaction, including the “consultancy agreement with UBS”, together with Value Partners’ “assessment” of the UBS transaction. Against this background, in November 2009, Mr Heininger and Dr Schirmer decided to fabricate evidence, signing a new engagement letter between KWL and Value Partners, backdated to 17 May 2006.
104.	Dr Schirmer had to accept that he had signed this document, since he had told the German prosecutors that he recalled signing a mandate with Value Partners in November 2009. But I cannot accept that he believed it to relate, as he claimed, to an exchange of the MBIA bond. By this time he knew that Mr Heininger had been charged with corruption involving Value Partners and that KPMG had been engaged to investigate. That would have called for extreme caution before signing any new agreement with Value Partners to ensure that he understood exactly what he was signing. 
105.	There is no sufficient basis to conclude, and no party suggested, that Dr Schirmer was aware of the monetary bribes paid to Mr Heininger, in connection with either the cross-border lease or the STCDOs, or of the fact that most of the premium generated by the STCDOs would be diverted to Value Partners. But I find that a time must have come when Dr Schirmer must have been aware that Value Partners or its predecessor had adopted a practice of providing extravagant and inappropriate perks to Mr Heininger which can only have meant that it was making lucrative profits from its role in connection with the cross-border leases and the STCDO transactions. That ought to have caused him to question whether Value Partners was giving disinterested advice to KWL. By the time of the 7 September 2006 board meeting it must have been apparent to him that something was wrong, and by the time of the expenses scandal in October 2006 he must have realised that the whole relationship with Value Partners was improper. From then on, for reasons which are not clear but which probably arose from a concern for his own position, he was prepared to collude with Mr Heininger in a cover up. The most likely explanation is that having begun to tell lies about the 2002 Concorde trip and knowing of the much more recent dealings with Value Partners, he felt unable to allow the truth to be known. However, although he could and should have asked some searching questions, I am not persuaded that Dr Schirmer in fact appreciated the impropriety of the relationship with Value Partners before September 2006.
The other KWL witnesses
106.	The other KWL witnesses (Mr Müller, Dr Schirmbeck and Dr Tippach) were members of the Supervisory Board of KWL. They gave evidence, which I accept, that they did not know that KWL had entered into STCDO transactions until the truth was revealed in 2009, and did not spot references to UBS in the board minutes, the accounts or the report on Mr Heininger’s and Dr Schirmer’s expenses which ought to have revealed these transactions. However, it must be said that they remained in ignorance of these matters in large part because of the Supervisory Board’s complete failure to exercise proper oversight over Mr Heininger and Dr Schirmer, or even to ask basic questions, for example at the board meeting of 7 September 2006. Their remarkable complacency continued even after reports of Mr Heininger’s corruption appeared in the German press and Mr Heininger responded to those reports with contradictory accounts.
107.	Lord Falconer for UBS asked Mr Müller, a member of the KWL Supervisory Board from January 2006 and its Chairman from February 2007 until February 2010 as well as the Deputy Mayor of the City, whether he felt that he had let the people of Leipzig down by not finding out earlier about the corruption of Mr Heininger. Mr Müller’s answer was that he did not. Whether that charge can fairly be laid against the members of KWL’s Supervisory Board is for the people of Leipzig to judge, but the evidence adduced in this case does not make it a difficult question.
LBBW and Depfa witnesses
108.	The witnesses called by LBBW and Depfa were truthful witnesses doing their best to assist, but their evidence was, not surprisingly, highly coloured by hindsight. That applies with particular force to their evidence about how they viewed the transactions involving them, and the incidence of risk, at the time.
109.	KWL made criticisms of the conduct of Mr Wiehler, in particular as to the way in which he dealt with the obtaining of a capacity opinion from Freshfields. I deal with these below. Mr Wiehler was lacking in experience, and was working largely on his own so far as legal issues were concerned. In some respects, as he admitted, he made mistakes which he attempted to disguise from his superiors. However, this does not detract from his overall honesty as a witness. 
THE STCDO TRANSACTIONS EXPLAINED
110.	In this section of this judgment I explain in outline the nature and effect of the STCDO transactions which the parties entered into, beginning with a summary of KWL’s existing arrangements which the STCDOs were designed to replace. 
The cross-border leases
111.	Between 2000 and 2005, KWL entered into four cross-border lease transactions. These were highly complex structures designed to take advantage of depreciation provisions under foreign tax laws and thereby to generate funds for KWL. Such arrangements were popular in Germany during the 1990s and the first half of the 2000s.
112.	The basic scheme of each of the cross-border leases, in greatly simplified terms, was that:
(1)	KWL as the Owner/Lessor leased its infrastructure assets to a special purpose vehicle (the “Trust”).
(2)	The Trust (funded by deposits from overseas investors and loans) made an up-front payment to KWL.
(3)	KWL used part of this payment to obtain a payment undertaking or bond from a highly rated bank or insurance institution (known in the jargon as the “defeasance provider”).
(4)	The Trust then sub-leased the assets back to KWL.
(5)	KWL was obliged to pay rent to the Trust for the term of the sub-lease, which enabled the Trust to pay interest on its borrowings and to pay a return to the investors.
(6)	The payments which KWL was obliged to make were funded by the proceeds of the bonds provided by the defeasance provider (which thereby “defeased” KWL’s debt). 
(7)	At the end of the sub-lease term, KWL had the option (which it would need to be in a position to exercise if it was to stay in business) to re-purchase the assets at a predetermined price. This would be funded by what remained of the bond provided by the defeasance provider.
113.	The benefit to KWL of entering into such transactions was to generate funds which could be used to upgrade its facilities, for running costs, to reduce what the citizens of Leipzig would otherwise have had to pay for their water or to make payments to the City of Leipzig for use elsewhere within the public sector. Such funds were generated because the Trust would be domiciled outside Germany and would therefore, because of tax rules applicable in different jurisdictions, be able to take advantage of deductions for depreciation which KWL itself was not able to realise. It was this which made possible the making of an upfront payment to KWL. However, the risk for KWL was that, if it failed to make rental payments as they fell due or failed at the end of the term to pay the price required to buy back its assets, it would lose control of the infrastructure for the supply of water and sewage facilities to the citizens of Leipzig which was the whole reason for its existence.
The single name payment undertakings
114.	The payment undertakings or bonds provided by the defeasance providers were therefore critical. There were four such undertakings:
a.	An undertaking by Balaba to pay £96.2 million in 2014 which supported what was known as the “Balaba” lease. 
b.	An undertaking by Merrill Lynch to pay US $65 million in 2025; this was guaranteed by Merrill Lynch Derivative Products AG and supported what was known as the “Wastewater” (or “WW”) lease. 
c.	A floating rate note issued by GECC pursuant to which GECC agreed to pay €77 million in 2014 which supported part of what was known as the “Freshwater” (or “FW1”) lease.
d.	A zero coupon bond issued by MBIA pursuant to which MBIA agreed to pay US $50 million in 2033 which supported the balance of the “Freshwater” (or “FW2”) lease.
115.	Thus KWL was exposed to the risk that, notwithstanding their high credit ratings, one or more of these defeasance providers (or “single names”) might default on its obligations and thereby render KWL unable to buy back its infrastructure assets when the cross-border leases came to an end. At the time of the STCDO transactions with which this dispute is concerned, Balaba was rated AA2 by Moody’s and A by Standard & Poor’s, while the three remaining providers were rated Aaa and AAA respectively.
The elements of the transactions in issue
116.	The arrangements described above constituted, in outline, the existing position of KWL in April 2006 when UBS first came on the scene. The transactions concluded with UBS (which were initially envisaged as a single package of agreements to be concluded between UBS and KWL) left those arrangements in place, but added further components:
a.	Credit Default Swap (“CDS”) agreements, by which KWL purchased credit protection from UBS on the risk of default by each of the single name defeasance providers. For a more detailed explanation of CDSs see [22] to [28] of the judgment of Hamblen J in Cassa di Risparmio della Reppublica di San Marino SpA v Barclays Bank Ltd [2011] EWHC 484 (Comm), [2011] 1 CLC 701. Thus KWL was effectively insured by UBS against the risk of default by any of the defeasance providers.
b.	STCDOs, by which KWL sold credit protection to UBS (and as events turned out, LBBW and Depfa) on the risk of default arising on a single tranche of a synthetic portfolio of reference entities. The purpose of these was to generate the funds required to pay for the CDSs and to provide the substantial upfront premium which KWL required. There is an issue whether they also represented a diversification of risk.
c.	Portfolio Management Agreements, by which UBS GAM agreed to manage each of those portfolios.
The Credit Default Swaps
117.	The CDSs represented a conventional hedge of the risk of default by the defeasance providers. If KWL had wished to purchase such a free standing hedge, and if it had the necessary funds, there was no reason why it could not have done so. That would not have eliminated its existing risk altogether, as it would still be exposed in the event of a default by both the defeasance provider and UBS (a “double default risk”), but it would have reduced it. However, to purchase such protection would have cost KWL money, the “spread” (i.e. the premium over Libor/Euribor, expressed in basis points or “bps”, each basis point being 1/100 of 1%) in return for which the protection seller (here UBS) agrees to make a payment if the entity concerned defaults. Such a free standing purchase of credit protection was of no interest to KWL. Its object in entering into the transactions was to generate cash.
Single Tranche Collateralised Debt Obligations
118.	A Collateralised Debt Obligation (“CDO”) is a type of structured investment in which the income from a portfolio of assets is divided into a set of hierarchical “tranches” with differing risk characteristics: see [32] to [38] of the judgment of Hamblen J in the San Marino case.
119.	Within a given CDO structure, a tranche is defined by its “attachment point”, its “detachment point”, and its tranche width:
a.	The attachment point defines the level of losses in the portfolio that is required before the tranche is impacted. This is usually expressed as a percentage of the total value of the portfolio (or “CDO notional”): thus a 4% attachment point means that if losses from defaults on the portfolio are less than 4% of the CDO notional, the tranche will suffer no loss; however, once losses exceed 4%, the capital value of the tranche will begin to be written down. 
b.	The detachment point defines the level of losses in the portfolio at which the tranche is exhausted. Thus a 5.5% detachment point means that once losses from defaults exceed 5.5% of the CDO notional, there is no income or capital remaining for distribution to holders of that tranche and their investment is wiped out.
c.	The tranche width is simply the difference between the attachment and detachment points. In the example given above it is 1.5%. Expressed in monetary terms, it represents the capital value of the tranche (i.e. the maximum that investors in the tranche can lose). Thus given a US $1 billion portfolio of investments, a tranche with a width of 1.5% would correspond to an investment (or “notional”) of $15 million.
120.	The attachment point can also be described in terms of subordination: the higher the attachment point, the more the tranche is protected by subordinate tranches who bear the first risk of loss and so the lower the risk of loss. The tranche width can also be thought of in terms of how quickly loss is suffered once subordination is eroded: all else being equal, it will take fewer additional defaults on the underlying portfolio to extinguish a narrower tranche than a wider one. 
121.	In a traditional funded CDO (as first structured in the 1990s):
a.	Each investor contributes capital which is used to acquire a portfolio of income-generating assets.
b.	The income and capital from these assets is allocated to different “tranches” of investors.
c.	In the event of a default in the underlying portfolio, the first loss is borne by the most junior (or “equity”) tranche. If there are sufficient defaults that nothing remains for that tranche, then it is said to be exhausted or wiped out; at this point any further defaults will begin to impact the next most junior tranche (the “mezzanine” or, if there is more than one, the “junior mezzanine” tranche), and so on.
d.	There is thus a hierarchy of risk, with the equity tranche being exposed to the highest risk and the most senior tranche having the lowest risk. In recognition of this, investors in the more junior tranches receive a higher return (or “spread”) on their investment than investors in the more senior tranches.
122.	The first CDOs to be structured were fully funded, that is to say, the investors purchased their investments up-front, with each investor putting in cash, which was then used to acquire the portfolio. Subsequently, however, “synthetic” CDOs were developed, in which a CDO was structured based on a portfolio of CDS contracts referencing such bonds instead of the bonds themselves. In such a synthetic CDO, the arranging bank creates the portfolio by selling CDS protection in the market against an agreed set of reference entities. A synthetic CDO can be structured on an unfunded basis, in which case the investors make no up-front payment but instead take on the risk of having to make a future payment in the event of sufficient defaults occurring in the portfolio to impact their tranche. In such a structure, the investors effectively sell credit protection against the performance of the underlying portfolio of reference entities, with each tranche of the CDO taking on a different part of the risk of that portfolio. The STCDOs in this case were synthetic and unfunded.
123.	Just as the buyer of protection under a CDS must pay a premium to the protection seller, so too must the buyer of protection under an STCDO. This can be paid quarterly or annually (or in any other way the parties choose) or, as in the present case, as a lump sum upfront payment. That is how the STCDOs generated an upfront payment for KWL. It was paid an upfront premium for taking on the risk of defaults in the portfolio impacting on the tranche for which it was selling protection to UBS and the other banks.
An example
124.	By way of illustration, suppose a single tranche with an attachment point of 4%, a tranche width of 1.5%, and an unfunded portfolio of 100 entities of equal value:
a.	The investor in this tranche will suffer no loss unless and until sufficient reference entities default so as to trigger payment obligations exceeding 4% of the notional value of the whole portfolio.
b.	In theory that could occur if more than four entities default, but in practice that will not happen because there will almost always be some recovery from a defaulting entity – a typical recovery rate was 40%, although this could vary.
c.	In practice, therefore, because each default typically uses up 0.6% of the subordination rather than 1%, the attachment point would not usually be reached until the seventh entity defaulted.
d.	Once the attachment point is reached, the entire loss of the next entities to default is borne by the tranche until the detachment point is reached.
e.	The tranche would then be completely exhausted once the tenth entity defaulted, with a complete loss of the investor’s “notional”.
The KWL STCDOs
125.	KWL entered into four STCDO transactions, one in respect of each of the single name long-term bonds:
a.	On 8 June 2006, KWL purchased credit protection from UBS on Balaba for a premium of US $1.6 million by means of a CDS, and sold credit protection to UBS on an A3-rated £153.7 million single tranche STCDO (with a tranche width of 1.5% covering losses between 3.6% and 5.1% of the portfolio) for a premium of US $22.7 million. Thus the net premium payable to KWL was US $21.1 million. The term of the STCDO was eight years.
b.	On 8 September 2006, KWL purchased credit protection from UBS on GECC for a premium of €1.2 million, and sold credit protection to LBBW (which in turn sold the same protection to UBS) for a ten year term on an Aa3-rated €76.7 million single tranche STCDO (with a tranche width of 1.5% covering losses between 3.5% and 5% of the portfolio) for a premium of €7.6 million. Thus the net premium payable to KWL was €6.4 million. LBBW’s fee (paid by UBS) was €2 million.
c.	On 28 March 2007, KWL purchased credit protection from UBS on Merrill Lynch and MBIA for a combined premium of US $5 million, and sold credit protection to Depfa (which in turn sold the same protection to UBS) for a ten year term on two Aa3-rated single tranche STCDOs (with sums at risk of US $33 million and US $83 million respectively and tranche widths of 1.5% covering losses between 4.2% and 5.7% of the portfolio) for a combined premium of US $12 million. The net premium payable to KWL on this transaction was US $7 million. Depfa’s fee (also paid by UBS) was €1.3 million. 
d.	Thus in the case of the transactions involving LBBW and Depfa, these banks acted as intermediaries (albeit as principals) in the STCDO transactions, although the CDS transactions were directly between UBS and KWL. The premium, after deduction of the intermediary bank’s fee, was settled directly between UBS and KWL. 
126.	The economic effect of these transactions, always assuming the solvency of UBS, was therefore to exchange KWL’s existing exposure to a default by any of the single name defeasance providers for an exposure to a diversified portfolio of investment grade securities. However, although at first sight this diversification looks like a spreading of risk over a large number of different entities (there were initially 100 entities in the Balaba portfolio and 160 entities in each of the other portfolios), in fact each portfolio was only as good as whatever turned out to be its (approximately) seven to ten weakest members over the term of the STCDO in question.
127.	In return for taking on this risk, KWL was to be paid a net premium of US $28.1 million plus €6.4 million.
128.	The risk to which KWL was now exposed was to be mitigated by management of the portfolio. Thus, in contrast with a static or unmanaged portfolio, steps could be taken to remove entities which appeared to be at risk of future default. For this purpose KWL engaged UBS GAM to manage the portfolio. Removing an entity from the portfolio meant that UBS GAM would have to arrange (in effect) for another participant in the credit market to take on the credit risk of the entity concerned, thereby releasing KWL from its obligation. However, if that entity was perceived as a credit risk, its spread was likely to have widened, meaning that anyone taking on the credit risk would need to be compensated for doing so. Removal could therefore be costly, with the cost being incurred in the form of a loss of subordination in the KWL tranche. But loss of subordination meant that fewer defaults would be required to reach the attachment point of the tranche. Knowing when to remove a deteriorating name or one which was at risk of deterioration therefore required careful judgment, and sometimes involved balancing the need to avoid a potential default against the loss of subordination which might have to be incurred to effect the removal. Moreover, it is a feature of STCDOs that they must remain fully invested. Removal of one or more entities must be balanced by the addition of others.
UBS’s profit
129.	UBS in turn needed to fund the upfront payment to KWL and to make its own profit from the transaction. It did this by selling equivalent protection in the market. From the premium which UBS received for doing this, it deducted its own transaction costs and its profit from the deal. Thus, although KWL would receive a premium, the premium which it would receive was necessarily less than the full market value of the protection which it was selling. By how much this was so would depend on UBS’s transaction costs and, importantly, the size of UBS’s profit.
130.	STCDOs could be extremely profitable for a bank and were so for UBS, largely as a result of their complexity (the above is a somewhat simplified account) and opacity to the client. Mr Czekalowski explained this in a passage which it is worth quoting at length:
“Q (by Mr Lord). There were going to be three elements.  In terms of the CDO, the CDO was going to be sold into the market by UBS, and it was going to generate, I'm suggesting to you, three different sources of revenue: one for KWL as premium, secondly, to cover what the bank called "our transaction costs", and thirdly, the bank's profit on the deal, which the bank calls "the bid offer spread"? Those are the three income streams, aren't they, from the STCDO, in broad terms?
A. Yeah.
Q. And it's right, isn't it, that the proportionate split between those three elements, or beneficiaries, is not set in stone, but is usually the subject of negotiation, isn't it?
A. As I said, sometimes yes, sometimes no.
Q. Take a straightforward example. The bank could take less profit out of the CDO and more revenue could be paid to the counterparty by way of premium, couldn't it?
A. It could, but we did find a fair number of counterparties who had, rather than trying to get, if you like, the best for themselves, had a target. They said: this is my target, if you get to this target, I will transact.  If you don't get to this target, I will not transact. And we always liked it when clients gave us targets, because we tended to be able to make more money out of those transactions. But the fact that the client gave us a target in this case was not in any sense unprecedented.
Q. But in the situation you've just put forward, where the client's given you a target premium figure, the counterparty is still going to be interested in the terms of the deal, isn't it, to make sure that the price of getting its target figure isn't a very risky trade that's allowing the bank to make a large profit on the CDO?  So there will be negotiation of the terms, even where the counterparty has come along and said it has a target figure. That's right, isn't it, Mr Czekalowski?
A. What I would say is that one reason why these STCDOs were a profitable business line for the bank is because it was almost impossible, given the complexity of the negotiations and structuring, for the client to be running two banks in competition up to the last minute, okay? The client pretty much, given the cost and complexity of the process, had to select a bank and then stick with that bank during the execution. When you know as a bank that you're in sole position on a highly complex product, where there's 200 different ways to move around value -- 200 is a figurative -- figure of speech, but many different ways to move around value, then it is difficult for the client to make a detailed comparison. And without the detailed comparison, it's hard for the client to negotiate, to make the kind of detailed push-back that you're asking for. In other words, the only way a client could really, at the last minute, push UBS to extract the best price would have been if there had been a second bank in there, say Deutsche Bank, also simultaneously pricing the same product, and if the client had been able to say, ‘Well, UBS, Deutsche is a million dollars better than you, can you improve by a million dollars? Yes or no?’ My point is there was only one bank in for that, you know, execution process, and that was UBS, so the client had kind of, without perhaps realising it, voided their ability to create price tension within the transaction.  Obviously we weren't going to point that out to them. And they gave us their target and we -- you know, we could hit it, they were happy.
Q. So paraphrasing: there were 200 ways for the bank to make money, because it had such a dominant position in this transaction, and KWL had voided their – your words -- voided their ability to create price tension within the transaction. What you mean by that, ‘voided their ability to create price tension’, what you're really saying there, Mr Czekalowski, is that KWL were really over a barrel here if they wanted to do this deal with UBS. That's what you're really saying, isn't it, that the bank held all the cards here?  That's right, isn't it?
A. If you go to a bank and you say, ‘I have to do a transaction within one month, and it's a highly complex transaction, I'm only talking to you, and my price target is X’, then you kind of have put yourself over a barrel, yeah.”
131.	Other bankers who saw the profit which UBS achieved in this case appear to have regarded the deal team as having pulled off something of a coup. One of these, from elsewhere in UBS, commented enviously to Mr Johnson when told what UBS was making on the deal:
“This is nuts. … Wish we could find clients like that here.”
132.	The profit which UBS anticipated as at 1 June 2006 (before intermediation came into play) was US $20 million for the investment bank plus a further profit of US $7.5 million in portfolio management fees for UBS GAM. Later, after the LBBW STCDO but before the Depfa STCDOs had been concluded, Mr Bracy reported to his boss that a profit of US $26 million had been booked by the investment bank so far, with a further profit of US $6 million for UBS GAM, and that there was more to come when the final STCDOs were concluded.
133.	UBS was not a charity and within limits it was entitled to achieve the most profitable deal for itself that it could so long as it did not mislead or take unlawful advantage of KWL. For its part KWL was not a consumer or some other kind of vulnerable counterparty and if it made a bad bargain that was its lookout. However, the fact that this deal was so profitable for UBS increased the risk that UBS would close its eyes to, or brush aside, issues which should have acted as warning signals of trouble ahead if this deal were to turn sour. This is what happened.
134.	The fact that UBS made its profit by selling equivalent protection in the market (also referred to as its hedging contracts) means that UBS was also exposed if KWL failed to pay when defaults occurred. Its profit did not come from anything which KWL might have to pay. For UBS the transaction was supposed to be risk neutral. It did not want, and would not benefit from, defaults in the portfolio reaching the attachment point. On the contrary, such defaults would expose it to heavy losses (which it has in fact sustained) in the event of non payment for whatever reason by KWL. 
Increased or reduced risk?
135.	An issue to which a great deal of attention was devoted at the trial was whether the overall effect of the transactions was to increase or reduce the overall risk to which KWL was exposed – or indeed, whether it was even possible to reach a meaningful view about this one way or the other.
136.	UBS’s expert on risk was Dr David Ellis. His evidence, at any rate as expressed in his written reports, was that as a general principle (and regardless of the particular characteristics of the corporate bond or STCDO in question) it is impossible to make a meaningful comparison of the overall credit risk of exposure to a single name corporate bond on the one hand and the risk of exposure to an STCDO on the other. Thus for Dr Ellis it would be impossible to say that KWL’s overall position as a result of the transactions was more risky, less risky or the same. Dr Ellis fought hard to maintain this position in cross examination, but I do not accept it. 
137.	On this question I prefer the evidence of Ms Terri Duhon, KWL’s expert, that a meaningful comparison can be made and that there is no doubt that entry into the CDSs and STCDOs increased the overall risk to which KWL was exposed. In my view Dr Ellis’s evidence to the contrary made little sense. It was also contrary to the evidence of numerous UBS witnesses whose evidence Dr Ellis was forced to say was wrong. For example, Mr Czekalowski explained how an STCDO could be designed either to increase risk (and earn a high premium) or to reduce it:
“Some CDO strategies -- in some CDO strategies, the client can consciously be trying to increase risk to increase their premium and their potential reward. In -- other CDO strategies are more conservative, there's a deliberate intent to reduce risk, reduce net risk and probably some risk transformation. Many transactions were designed to be sort of in the middle, to be in theory zero risk transactions, or zero net risk transactions, where the risk, although it had been transformed -- where the risk after the operation was approximately equal to the risk before the operation.”
138.	What Mr Czekalowski was describing would not be possible if no meaningful comparison could be made. Indeed, by the end of his cross examination by Mr Simon Salzedo QC for KWL, even Dr Ellis had to agree not only that a comparison could be made but that the STCDOs did expose KWL to greater risk than it had faced before:
“Q (by Mr Salzedo). The reality is clear for anyone who looks at it that the spreads, and the ratings, and the premium, and the enormous multiple between them, correctly identify that these tranches were massively more risky than the single names they replaced?
A. No, I disagree with that for all the reasons I've already stated during the course of the day.
Q. Including your acceptance that the market price does indicate, unless there's some reason to think otherwise, that the market at least thinks that these tranches are not risky, you still think they're not?
A. I believe that KWL was fairly compensated for the risk it was taking on under the transaction. 
Q. That wasn't the question, was it, Dr Ellis?
A. Yes, the STCDOs were certainly -- had a lower rating, and they certainly had a higher spread, and in that sense they could be viewed as being riskier.
Q. And if you're right that the premium was fair compensation for that risk, then that is another factor that tends to suggest they were riskier, isn't it? 
A. Yes.
Q. So your expert view would be that they were in fact riskier?
A. They were risky, yes.
Q. Riskier.
A. Oh, sorry.  I beg your pardon, I misheard.  I thought you said they were ‘risky’.
Q. No, riskier, for the reasons you have just identified?
A. Yes.”
139.	In the light of this acceptance, it is perhaps unnecessary to say much more about this, but it may be worth explaining some of the factors which led Dr Ellis to acceptance of this conclusion. Whether exposure to an STCDO is more or less risky than exposure to an individual bond will depend on a number of factors, including the identity of the bond issuer, the contents of the STCDO portfolio, the attachment and detachment points of the tranche and the extent to which the portfolio is diversified. To adapt an example given by KWL:
a.	Suppose the credit protection seller had an 8-year exposure to the risk of default by a single highly-rated entity – say, the German Government. The risk of suffering a loss would be remote. 
b.	Under the STCDO in the example at [124] above, an STCDO with an attachment point of 4% and a tranche width of 1.5%, the credit protection seller is exposed to the risk of default of any seven of 100 entities, after which a further three defaults will wipe out the tranche. Suppose the portfolio contained thirty entities rated BBB or lower (as the Balaba STCDO portfolio did). The likelihood that between seven and ten of them will default over an 8-year period is higher than the risk of the German Government defaulting over that same period. In such a stark case the credit protection seller is therefore obviously in a worse position under the STCDO than it was when facing the single-name risk. The fact that the STCDO portfolio may be described as “diversified” or even that both risks may be regarded as low does not negate this.
c.	Equally obviously, if the attachment point is reduced, for example to 3.5% or 3.6% (as in the case of the GECC and Balaba STCDOs respectively), the risk of loss is correspondingly greater as fewer defaults are needed to impact the tranche.
d.	In general the purpose of diversification is to spread risk over a variety of different economic sectors and countries and to reduce or eliminate idiosyncratic risk (a risk which is peculiar to an individual name). In that way the risk of exposure to a risk affecting an individual sector or a single national economy is reduced. But if the entities in the portfolio are too concentrated, the tranche will be exposed to multiple defaults affecting a single sector. The extent to which risks are common to a number of entities so that one default is likely to lead to others is known as “correlation”. 
e.	Moreover, in the case of an STCDO, at any rate in the case of these STCDOs with their low attachment points and narrow tranche widths, the idea that idiosyncratic risk had been reduced or eliminated by diversification was to some extent illusory. Instead of being exposed to the idiosyncratic risk of four single names as it was before, KWL was now exposed (at any rate once the attachment point was reached) to the idiosyncratic risks of all 100 (or as the case might be 160) entities in the respective portfolios.
f.	Further, the effect of leverage (as this term is used in the context of an STCDO) is that once the attachment point is reached, the tranche holder is exposed to the full loss resulting from the default of any individual name and not merely to a small percentage of that loss.
140.	Although working out the default risk involved in an STCDO involves a complicated calculation, nevertheless three broad measures of risk provide a reasonably straightforward (although not a mathematical) comparison between the STCDOs and the individual bonds provided by the defeasance providers. These are premiums, ratings and spreads.
Premiums
141.	One simple way to compare the risks is to compare the premiums payable for taking them on. A credit default swap is in effect a policy of insurance against the risk of a default of a single named entity, while an STCDO is in effect a policy of insurance against the risk of default of the single tranche. In relation to each transaction, the premium paid by KWL for single name protection (the CDS) was much smaller than the premium paid by UBS for protection from the risk of default on the tranche (the STCDO). By way of example, KWL paid US $1.6 million for protection against the risk of default by Balaba, while UBS paid US $22.7 million (some 14 times as much) for an equivalent amount of protection on the Balaba STCDO. Moreover, this latter figure was itself substantially less than the total premium (which also included UBS’s profit and other charges) which UBS received from selling the same protection in the market. It would be misleading to say that the STCDO risk was therefore 14 (or more) times greater than the single name risk, but such a striking difference in the figures does at least suggest that the STCDO carried a significantly higher risk.
Ratings
142.	Ratings issued by ratings agencies are widely used in the market as a measure of risk. Just as an individual bond may be given a rating, so too may an STCDO. The rating represents the ratings agency’s perception of the creditworthiness of a given entity and is obtained by financial modelling using extensive historical data. Inevitably, a model can never be fully accurate and cannot predict with certainty the circumstances in which an entity will or will not default. It must be borne in mind also that the modelling exercise for an STCDO is not in all respects the same as for an individual bond. In general, however, it would be expected that if the risk of default under an STCDO was lower than the risk of default under an individual bond, the STCDO would have a higher rating than the provider of the bond. Conversely, a lower rating for the STCDO would suggest a higher degree of risk than for the single name. 
143.	Dr Ellis’s evidence was that it is not possible to compare the credit risks of a corporate bond with that of an STCDO by reference to their respective ratings. Notwithstanding his somewhat technical explanation of why this did not contradict his earlier evidence as an expert witness in Australian proceedings (Bathurst Regional Council v McGraw Hill International (UK) Ltd), I found this hard to reconcile with his evidence in those proceedings to the effect that it was possible to make meaningful comparisons across different asset classes by reference to ratings and that it was important to investors to be able to do so. In fact the ratings agencies strove hard to ensure consistency in rating as between corporate bonds and CDOs and, as I understood his evidence, Dr Ellis came to accept that there was a valid comparison to be made, at any rate as a starting point, although other factors also needed to be taken into account. 
144.	Further, it appears with hindsight that CDOs were, if anything, overrated compared to corporate bonds. In December 2007 Moody’s introduced changes to the model used to calculate CDO ratings which resulted in the downgrading of many STCDOs, while further changes were introduced in 2009 (after the chastening experience of the 2008 financial crisis) which resulted in a more rigorous approach to the rating of CDOs. Ironically, the evidence of KWL’s risk expert, Ms Terri Duhon, was that at any rate in 2004-5 many structuring banks regarded an STCDO as a slightly safer investment than a corporate bond with the same rating, although not in any way that could be quantified. Although she did not accept this, I see no reason to suppose that the position was different in 2006-7. However, that perception would not apply if (as here) the ratings were different.
145.	A comparison of the ratings for the individual bonds and the KWL STCDOs which (in economic terms) replaced them is set out in the table below:
Single names	Moody’s	S & P	
Balaba	Aa2	A	
Merrill Lynch Derivative Products AG	Aaa	AAA	
GECC	Aaa	AAA	
MBIA Global Funding LLC	Aaa	AAA	
STCDOs			
Balaba	A3		
LBBW (GECC)	Aa3		
Depfa (MBIA/Merrill Lynch)	Aa3		
146.	Moody’s explanation of its ratings system is as follows:
Aaa	Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.	
Aa	Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.	
A	Obligations rated A are considered upper-medium grade and are subject to low credit risk.	
Baa	Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics. 	
Ba	Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.	
B	Obligations rated B are considered speculative and are subject to high credit risk.	
Caa	Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.	
Ca	Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.	
C	Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.	
Note: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.	
147.	In each case, therefore, the STCDO concluded by KWL was rated at least three notches lower than its corresponding single name bond rating (the Balaba STCDO was four notches lower). I accept the evidence of Ms Duhon that this is a sufficiently significant difference for a valid comparison to be made and that it suggests that the STCDOs were higher risk. That said, however, the rating of three of the four STCDOs indicated that they were still regarded as being of high quality and subject to very low credit risk, albeit towards the lower end of that rating category, while even the Balaba STCDO was regarded as subject to low credit risk.
148.	I should add that the Moody’s ratings for these STCDOs took account of the premium which KWL received. Some of the UBS witnesses suggested that such premium is not taken into account by Moody’s in rating an STCDO. This would mean that the premium received could be set against the reduced rating when considering the overall risk position. It is correct that sometimes Moody’s did not take such premium into account, particularly if the premium was payable over the life of the STCDO rather than upfront. In this case, however, where the premium was paid upfront, Moody’s made clear that the premium had already been taken into account in arriving at the ratings. In other words, it was because of the premium that the STCDOs were rated as highly as they were. 
149.	UBS submits that the premium is relevant in a different sense when assessing the overall change in risk. That was because the Moody’s ratings model (which involves a complex analysis of historical data) showed low “expected loss” figures for the STCDO. For example, the Balaba STCDO “expected loss” figure was about US $2 million. It was suggested to Ms Duhon, initially by reference to the Balaba STCDO figures although the same point applies similarly to the other STCDOs, that for the risk of an expected loss of only about US $2 million over an eight year period, receipt of an immediate net upfront premium of US $21.1 million represented a reduction of KWL’s overall financial risk. However, I accept Ms Duhon’s evidence that this is not a valid comparison. The “expected loss” figure produced by the ratings model is no more than a probability weighted number calculated by reference to a large number of historical scenarios. It does not represent a reliable prediction of what KWL could actually expect to lose. Indeed, if this were a valid comparison, it would lead to a conclusion that the higher the premium, the less risky the STCDO, which is clearly not the case as Mr Czekalowski made clear (see [137] above).
Spreads
150.	Spreads are another measure of risk. Credit default spreads are the market prices for the credit risk represented by single names. Such prices are influenced by a variety of factors, of which the perceived risk of default is only one (others include liquidity and market sentiment), although the evidence suggested that this perceived risk often represents a substantial (but ultimately unquantifiable) element of the spread. However, such spreads also exist for an STCDO and represent the notional price which a market participant would require in order to take on the obligations in question. 
151.	A simple comparison of the spreads applicable to the individual bonds and the STCDOs is not appropriate. The two are derived in different ways, the former being an ascertainable market price while the latter is a notional figure calculated by means of a complex computer pricing model as there is no actual market in STCDOs. Moreover, it was recognised that for two products with the same rating, the spread applicable to an STCDO would generally be higher than the spread of a corporate bond. It was this phenomenon of “spread pickup” which enabled traders to create an arbitrage between the two products. Nevertheless, allowing for these considerations and for the fact that spread is not exclusively a reflection of credit risk, the fact that a lower rated STCDO had a significantly higher spread than a corporate bond would provide a good indication that the STCDO should be regarded as carrying greater overall risk.
152.	A comparison of the spreads applicable to the CDSs and the equivalent STCDOs is shown in the following table. (There were minor differences between UBS and KWL as to the applicable figures, but these were not material: in each case I have taken the UBS figure, rounded to the nearest whole number):
CDSs 	Spread (bps)	
Balaba	19	
GECC	23	
MBIA Global Funding LLC	55	
Merrill Lynch Derivative Products AG	61	
STCDOs (bps)		
Balaba	349	
LBBW (GECC)	371	
Depfa (MBIA/Merrill Lynch)	385	
153.	As already indicated, a simple arithmetical comparison would not be valid. However, even allowing for the fact that the spreads take account of a wider range of factors than just the perceived risk of default and for the phenomenon of “spread pickup”, the differences are striking. I accept Ms Duhon’s evidence that while spreads are not an absolute measure of risk, these figures do provide a reasonable relative measure of risk, suggesting that the STCDOs would be perceived by the market as carrying greater risks than the individual bonds.
Overall
154.	Although none of these different measures can be regarded as definitive, they speak with a consistent voice. They all suggest that the risks to which KWL was exposed by entering into the STCDOs were greater than the risks to which it had been exposed under the individual bonds. If it had not been for the fact that many of the UBS factual witnesses, as well as UBS’s risk expert Dr Ellis, devoted a great deal of time and effort to an argument that no meaningful comparison could be made between the single name risks and the STCDO risks, it might have been thought that it was obvious that the latter were materially greater than the former. In this context I found the evidence of Ms Short a welcome contrast to that of other witnesses. Although some UBS witnesses and Dr Ellis were eventually persuaded to agree that the STCDO risks were greater, Ms Short needed no such persuading. Asked by Mr Tim Lord QC for KWL whether the effect of the transaction initially proposed (whereby all four individual bonds would be replaced by STCDOs entered into directly with UBS) would be to reduce KWL’s risk overall, she said this:
“I don't think you could describe it as reducing. What it was doing was reducing the idiosyncratic risk on four names and giving them a more diversified risk. But you can't describe it as reducing the risk, because they were getting an enhanced yield. So I think, by definition, if you're getting a better yield you're almost certainly taking more risk.
Q. So is your evidence that you understood this transaction to be increasing the overall risk of the provincial water company?
A. Yes.
 Q. You thought it was increasing their risk?
A. If it was reducing the risk, I wouldn't have been concerned about its suitability. It was only because it was increasing their risk, and in certain circumstances --
Q. Yes.
A. -- that that could be a substantial number, that I was concerned about it.
Q. I understand. So you would have had no doubt when you were looking at this STCDO that it was going to increase the risk of the water company?
 A. Yes.
Q. And that obvious increase in risk would have been obvious to anybody within the UBS deal team who knew anything about STCDOs, wouldn't it?
 A. Yes.”
155.	Ms Short had great experience of assessing risk and was in fact concerned at the time that the effect of this transaction would be to increase KWL’s overall risk. It was for that reason that she regarded it as an unsuitable transaction for a municipal water company such as KWL. She regarded the fact that the risk was increased as obvious, and thought that it would also have been obvious to the UBS deal team. I accept that evidence.
156.	It is, however, fair to say that although the STCDOs represented in comparative terms a substantial increase in the risks to which KWL was exposed, on one view the risk remained low in absolute terms. As already noted, even the lowest rated Balaba STCDO was A rated by Moody’s which meant that it was “considered upper-medium grade and … subject to low credit risk”. Based on historical data, the risk of sufficient defaults to exhaust the tranche over an eight to ten year term could be calculated as no more than (at most) a few percentage points. The various portfolios were made up of investment grade bonds and similar securities and it would have taken dramatic economic events in order for sufficient defaults to occur to reach the attachment points of the KWL tranches, let alone to render KWL liable for the full value of its notional. 
157.	Nevertheless, although one view might have been that these were low risk transactions, I found the evidence of Mr Geoghegan of Depfa on this point compelling. He was an experienced banker and his evidence was that he understood that the purpose of the STCDOs was to raise money for KWL rather than to reduce risk. Pressed in that context to agree that the Depfa STCDO should not be characterised as involving high risk, Mr Geoghegan insisted that the risk of a full loss of the notional was still significant:
“Q (by Lord Falconer). You would never characterise this transaction, as far as KWL are concerned, as a high risk transaction?
A.  I would regard it as bearing significant risk.  It is -- the way tranche structures work is that you have X number of defaults in a portfolio that can actually happen before your principal is affected. I can't remember the exact number, but I think six or seven names had to default in the market. There are 200 names in the reference portfolio that they were investing in. Six or seven names of those had to default before their principal was affected. After that point, their principal is getting marked down very aggressively. The tranche width, as you can see, is 1.5 per cent, which is quite thin in these sort of transactions. The subordination level is quite low. So there was significant risk in that transaction. But as I said, I took significant comfort from the fact that GAM, UBS, had basically structured this deal for them, they were trying to reorganise their credit exposures, but there was risk in that deal.
Q. Well, there was risk, but it did not look, as far as you were concerned, inappropriately high risk?
A. I think it was significant risk. I briefly looked at the reference names that were in the portfolio, those names seemed to be of reasonable quality, in my opinion.
Q.  There were 160 of them?
A. Yes.
Q. So you are saying there was risk in this?
A. Yes.
Q. And the risk was the full amount of the notional if it went really wrong?
A. Yes.”
158.	Unfortunately the dramatic economic events required to trigger KWL’s exposure under the STCDOs were precisely what lay around the corner in the shape of the global financial crisis of 2008. Moreover, that this represented a real risk over the 8 to 10 year term of the STCDOs was not only foreseeable but was actually foreseen by Mr Bawden of UBS’s Credit Risk Committee. With some prescience he insisted on recording his refusal to approve the transaction even after UBS’s top management had overruled CRC’s initial refusal. He did so precisely because of the risk of such “an extreme stress event”:
“Given my concerns about the appropriateness of this transaction, considering the potential impact of an extreme stress event on the financial standing of client the client suitability determination and diversification benefit rationale were referred to and approved by Global Head of FI (Bunce) and IB CEO (Jenkins).”
159.	Accordingly the STCDOs involved a low, but nevertheless real, significant and foreseeable risk of the loss of the full value of KWL’s notional, resulting in a potential liability of several hundred million dollars. That risk was materially greater than the risks to which KWL was already exposed under the single name bonds. As a result of the events of 2008 and the defaults which followed over the next couple of years the STCDOs were starkly exposed as being what in truth they always were – speculative transactions involving massive potential liabilities which were thoroughly unsuitable for a municipal water company such as KWL, even one which was keen to raise money on the international capital markets. Even then, however, the portfolios as originally assembled would not have resulted in a total loss of KWL’s investment. In the event it was only because of the changes to the portfolio made by UBS GAM that such losses occurred. Whether UBS GAM’s management was negligent is one of the issues to be considered in this judgment.
DETAILED NARRATIVE 
160.	I set out in this section of the judgment a chronological narrative account of the relevant events. Although this account will necessarily be lengthy, I shall aim to confine it to what is necessary for an understanding of the issues which arise between the parties without attempting to deal with every factual point explored in the evidence. I shall also make findings as to the principal factual matters in issue, the legal significance of which will need to be considered in later sections. 
The background to the parties’ initial discussions
161.	I have described at [111] to [113] above the four cross-border leases into which KWL entered between 2000 and 2005 in order to raise funds. These were approved by KWL’s Supervisory Board and were already in place before UBS had any dealings with KWL. UBS played no part in marketing or structuring them. They were highly complex. Only entities with some level of financial sophistication, or at any rate with access to specialist advice, would have entered into such transactions. The fact that KWL had entered into these leases therefore said something to UBS about KWL, but this should not be overstated. KWL remained a municipal water company and the four cross-border leases which it concluded were four out of a large number of such leases entered into by municipal or municipally-owned entities during this period.
162.	As already indicated, there was an existing and corrupt relationship in place between KWL and Value Partners. Value Partners (and its predecessor, Global Capital Finance) was involved as KWL’s adviser in concluding and structuring at least the last three of KWL’s cross-border leases. Global Capital Finance had been engaged by KWL pursuant to an Engagement Letter signed in July 2002 by Mr Blatz and Mr Senf on the one hand and by Mr Heininger and Dr Schirmer on the other. In July 2005 KWL entered into an agreement with Value Partners under which KWL handed over all regular reporting and monitoring tasks to Value Partners for all previously concluded and future cross-border leases.
163.	The corruption had begun with the giving of generous gifts and expenses paid luxury trips to Mr Heininger and others at KWL and other Leipzig municipal entities. For example, Mr Kaminski (Treasurer of the City of Leipzig and Chairman of KWL’s Supervisory Board until 2004 when he was suspended because of these matters) accepted two luxury trips to the hotel Burj Al Arab in Dubai in 2003 paid for by Global Capital Finance. He was charged and later convicted with having accepted bribes and with tax fraud. Mr Hanss (managing director of KWL’s main shareholder LVV and of KWL’s sister company LVB) was convicted for the same reason in June 2011. Allegations about Mr Heininger’s trips to Dubai and a Concorde trip to New York in November 2002 by Mr Heininger and Dr Schirmer were to surface in the Leipzig press in September 2006 and play an important part in the story (see [445] below). By 2005 the corruption of Mr Heininger had escalated to the payment of substantial bribes (see [54] above).
164.	By early 2006 KWL was under pressure to raise further funds. Investment to upgrade its outdated facilities was badly needed and it was required by the city authorities not only to keep its prices down but to make a contribution to other municipal infrastructure projects. Local sources of funding had been utilised as far as they could be. KWL sought, therefore, to explore the possibility of new sources of funding in the international capital markets. That had already been the motivation for the cross-border leases but that source of funding was drying up, partly because the tax loopholes which had made such transactions worthwhile were being closed and partly because KWL had now leased all of its relevant infrastructure assets. The raising of funds was primarily Mr Heininger’s responsibility.
165.	At the same time Mr Heininger and Messrs Senf and Blatz were keen to find new ways to profit personally at KWL’s expense. As Mr Heininger admitted in his evidence in the German criminal proceedings against him, already by February or March 2006 he was seeking a further opportunity for personal enrichment. As he put it, “the subject of bonus was always in the air between Senf, Blatz and me” at that time. 
166.	It seems from what Mr Heininger told the German authorities that he had heard something about the possibility of restructuring cross-border lease arrangements in ways that could be used to generate additional funds and that he expressed interest about this to Value Partners in early 2006.  One likely source of such information was literature obtained in March 2006 from a German financial consultancy company called Due Finance. This discussed in very general terms the possibility of restructuring such leases by means of credit default swaps. It identified two possible motivations for concluding such arrangements. One was to generate additional yield. The other was to reduce risk by enhancing the creditworthiness of the risks to which a company was exposed. The article warned, however, that “it is obvious that both goals cannot be achieved at the same time”. 
167.	I see no reason to doubt that Mr Heininger understood from the outset that these two objectives could conflict. What he was interested in was generating additional yield, principally for his own corrupt benefit. His email to Nadja Teichert of Value Partners of 9 March 2006 shows a recognition that in order to obtain a financial benefit from this type of transaction it was generally necessary to accept an increased risk. No doubt he would not have wanted to increase the risks to which KWL was exposed to a dangerous level, not least as that would increase the risk of exposure of his own conduct (as eventually occurred), but I see no reason to doubt, and I find, that Mr Heininger was from the outset prepared to accept some increase in risk as the necessary price of obtaining upfront cash. This is in accordance with other evidence which he gave in Germany, to the effect that so long as the rating of the STCDOs was higher than KWL’s own shadow rating, he regarded the STCDO risk as acceptable. 
168.	Similarly Dr Schirmer’s evidence both in Germany and in this trial was that KWL’s motivation in entering into the STCDOs was to generate additional yield and that reduction of risk “was not a causal factor” or was at most a “subordinate” aspect with the earning of additional profits being the “priority”. I accept that evidence.
169.	This is of some significance because important parts of KWL’s case (in particular, its misrepresentation case) were premised upon the fact that the purpose of the transaction for KWL was to reduce its overall risk. But I find that this was not the purpose of KWL’s primary (and for practical purposes only real) decision maker, Mr Heininger, and that he never believed that the transaction would have this effect. Moreover, to the very limited extent that KWL’s other managing director, Dr Schirmer, had any understanding of the transaction, risk reduction was at most a very subsidiary purpose so far as he was concerned, though it is clear that he was in any case prepared to go along with whatever Mr Heininger proposed.  
170.	There was, nevertheless, much cross examination of UBS witnesses to the effect that the STCDOs were presented or sold to KWL as risk reducing transactions. Some UBS witnesses agreed with this as a general proposition. However, it is necessary to examine the contemporary documents to see what was actually being said by UBS on particular occasions and what was important to KWL. It is also necessary to bear in mind the difference between what was being said by and to KWL as the reason for the transaction and the effect which it could be expected to have on the one hand and what was being said to UBS’s Credit Risk Committee in order to obtain approval for the transaction on the other. The UBS deal team and in particular Mr Bracy understood that in order to obtain that approval, it would be necessary to present the transaction to CRC as one which was suitable for KWL because it reduced KWL’s overall risk. But that is very different from saying that this was actually what motivated KWL to conclude the transaction.
The 6 April 2006 conversation between Mr Bracy and Value Partners
171.	Mr Senf and Mr Blatz were also interviewed in Germany. They said in those interviews that they did not know much about credit default swaps when Mr Heininger raised this subject, but they carried out some investigations. These included talking to Mr Bracy, a former colleague at CSFB with whom they had worked on leasing transactions in the period 1998-2000, who was now working in UBS’s Municipal Securities Group in New York, and he told them about STCDOs, a product which UBS had developed.
172.	Mr Bracy’s evidence was different. He said that he contacted Mr Blatz at the beginning of April 2006 in connection with a potential new product called “MATILDA” which he had been developing, that he did so as part of a process of testing whether there was any market appetite for such a product, and that it was Value Partners who proposed a restructuring of KWL’s cross-border leases by means of CDOs. Essentially his evidence painted a picture whereby the STCDO transactions were brought to UBS by Value Partners in something very close to what was intended (before the issue of intermediation arose) to be their final form.
173.	At all events, a telephone conversation took place between Mr Senf and Mr Blatz of Value Partners and Mr Bracy of UBS on 6 April 2006. This was the first communication between them relating to what became the STCDOs and was to lead to what I find to be the arrangement between them which KWL contends comprises an agency relationship or, at the least, gave rise to an obvious conflict of interest. In some ways it might seem difficult to make findings about this and other conversations between three participants, two of whom (Messrs Senf and Blatz) did not give evidence in the trial and whose accounts given in other proceedings suffer from the disadvantage that they are dishonest criminals, while the third (Mr Bracy, who did give evidence) was also dishonest and a thoroughly unsatisfactory witness. Nevertheless the available documents and the way in which matters developed make the position reasonably clear. I make the following findings as to this particular conversation:
a.	The MATILDA product was probably mentioned, but only in a very general and preliminary way. It was not at all clear from Mr Bracy’s evidence exactly what this product was. Whatever it was, it had not been developed by Mr Bracy beyond a vague and general concept. It is probable that any discussion of it was quickly dropped and never re-emerged, in favour of a discussion of CDOs and how they could be used to generate additional yield by restructuring cross-border leases.
b.	It is likely that it was Mr Senf and Mr Blatz who first raised the subject of the possible restructuring of cross-border leases by means of credit default swaps. They did so having been asked to find out about this by KWL, but raised the subject as being something which might interest their clients generally, without mentioning KWL by name. However, they asked about this in general terms, making clear that they did not know much about this topic.
c.	Mr Bracy, who had been involved in a UBS marketing campaign in Europe the previous year to promote the use of CDOs for restructuring cross-border leases, was able to and did describe the way in which STCDOs might be used for this purpose. 
d.	Mr Senf and Mr Blatz expressed interest. Even if they did not immediately understand all the details of how an STCDO would work, they would have grasped without difficulty the opportunity which such a product presented to generate upfront cash. It presented them with an ideal opportunity to profit further at KWL’s expense, and moreover to do so with very little risk to themselves. While the STCDOs would involve exposing KWL to potentially crippling liabilities if sufficient entities within the portfolios defaulted within their term, the risk of this happening, although real (and the higher the premium, the greater the risk), was thought to be very low.
e.	Mr Bracy promised to provide more information. He saw this as an opportunity for UBS to conclude a lucrative transaction which would benefit him personally by enhancing his status and remuneration within UBS. He would have understood that the complexity and opaqueness of an STCDO made it extremely profitable for the bank in ways which were not easily visible to the counterparty.
f.	Moreover, I think it probable that even at this early stage Mr Bracy and Messrs Senf and Blatz discussed at least in a preliminary way what would become the arrangement between them, discussed further below, whereby Value Partners would “deliver” their clients to UBS for such transactions.
174.	It is therefore wrong to say, as UBS does, that it was KWL who approached Value Partners, and Value Partners who approached UBS, with what became the transactions at issue in this case. Rather it was Value Partners, prompted by Mr Heininger, who had heard something about the possibility of using credit swaps to generate cash, a concept with which Value Partners was not familiar, who asked Mr Bracy for information about this, and it was Mr Bracy who suggested that the answer to this question was an STCDO.
175.	Mr Blatz followed up the conversation with an email to Mr Bracy:
“like always great talking to you!! Would be really wonderful if we could work together on this new product. I can assure you that we would have the right clients. Take care and talk to you soon.”
176.	The new product for which Mr Blatz was confident that Value Partners “would have the right clients” was an STCDO, not (as Mr Bracy claimed) MATILDA. There was never any follow up with Value Partners about MATILDA, which there would have been if Mr Bracy had thought that Mr Blatz was expressing interest in this. All further communications with Value Partners were about STCDOs, for KWL and potentially other Value Partners clients.
177.	The context for Mr Blatz’s comment about “the right clients” was that Value Partners had a client list, principally municipal entities for which it had arranged cross-border leases. Mr Blatz was therefore expressing confidence that Value Partners would be able to interest those clients in concluding STCDOs with UBS.
178.	On 10 April 2006 Mr Bracy forwarded to Value Partners two presentations which UBS had previously prepared on the use of CDOs to restructure cross-border lease exposures. One of these was for France Telecom. The other was for more general marketing, not directed to any particular client. Mr Bracy sent these as a means of explaining in greater detail than was practicable in the 6 April telephone conversation what STCDOs were and how they worked. They were not at this stage intended to be used directly as a presentation to any particular Value Partners client. Mr Bracy added, for Mr Senf’s benefit, that “CDO is a collateralised debt obligation.” A week later Mr Bracy sent Value Partners an extract from a text book containing an introduction to CDOs. 
179.	It would be surprising if a financial adviser such as Mr Senf did not know what a CDO was (or what those initials stood for) but evidently Mr Bracy (who knew Mr Senf well) understood that Mr Senf did not. If he did, the explanation and the sending of a textbook introduction to CDOs would have been not only unnecessary but somewhat patronising. It would not have been a promising start to a revival of what Mr Bracy hoped would be a relationship which was critical to his future prospects in circumstances where the market for cross-border leases (where his expertise lay) was ceasing to exist. The fact that Mr Senf needed to be told what “CDO” stood for and that Mr Bracy thought it would be useful to send these materials indicates that Value Partners did not have expertise in relation to STCDOs. While Mr Senf and Mr Blatz would no doubt have been capable of understanding the material sent to them without undue difficulty (in Mr Bracy’s phrase, that would not have been “a heavy lift” for the people at Value Partners), they cannot have held themselves out to Mr Bracy, or been regarded by him, as experienced advisers in this field. 
180.	The UBS presentations described STCDOs as providing diversification, which could either result in a lower risk on an unchanged return or a higher return on an unchanged risk, with risk being assessed by means of credit ratings.  
181.	Value Partners did not pass these UBS presentations on to KWL, but used them to prepare its own presentation explaining the concept of a CDO-based restructuring without mentioning UBS. The Value Partners presentation explained that KWL would be replacing single-name credit risks with a diversified portfolio, but that it was for KWL to choose the rating it wanted for the CDO and that it would bear the risk of losses exceeding a given threshold.  
The arrangement between Mr Bracy and Value Partners
182.	On 11 April 2006 Mr Senf and Mr Blatz sent Mr Bracy details of a cross-border lease exposure for one of their clients (in fact KWL, although KWL was not named), commenting that:
“We've talked already to the client and got a positive feedback on the product briefly explained to them. Please note, that this client is high yield minded and expects a risk weighted return.”
183.	I see no reason to doubt that Value Partners had spoken to Mr Heininger and that although they had at this stage given him no more than a brief explanation of the STCDO product, they and he had immediately grasped the potential for the product to generate cash: hence the reference to the client being “high yield minded”.
184.	Mr Bracy told Mr Senf that he would pass this message on to “my structuring guy in London”. That was Mr Sanz-Paris of UBS’s Credit Structuring desk. He did so, telling Mr Sanz-Paris to keep it confidential “until we speak to strategise” and commenting:
"They heard about our restructurings and feel very strongly that they can deliver the client. The value is 255 US. They feel the client would like to see a AA cdo with aggressive structure to maximize yield (up front dollar value), as well as a moderate structure for comparison. These guys have more to come as well."
185.	Several aspects of this message require comment.
186.	First, Mr Bracy was at all times extremely concerned to ensure that he was appropriately rewarded by UBS for his efforts to secure this transaction and any further transactions concluded through Value Partners, and that he was not cut out of any deal by the UBS bankers in London. He was employed in the Municipal Securities Group in the United States, which had no STCDO or structuring expertise, and he was therefore dependent on the structuring team in London to bring such deals to fruition. He had previous experience of a similar deal where he had been cut out and was anxious that this should not happen again. He recognised, correctly, that his only contribution to the deal consisted of his relationship with Value Partners, and that others in London (in particular UBS’s Debt Capital Markets group, the group responsible for marketing structured CDOs in Europe, headed by Mr Jordan who would typically have filled the client relationship role) would have no scruples about excluding Mr Bracy if they could in order to take the credit for the profit which UBS could be expected to make from the deal. Mr Sanz-Paris was the only member of the London structuring team that Mr Bracy trusted and he was concerned that a mechanism should be put in place to reward him before the Debt Capital Markets group and in particular Mr Jordan got a chance (as he saw it) to muscle in on his deal. This reflected what appears to have been a predatory culture within UBS, at any rate at that time, whereby UBS staff would not only (as it were) eat what they killed, but would fight each other if necessary for a share of the prey. It was this concern which lay behind Mr Bracy’s request to Mr Sanz-Paris to keep the matter confidential.
187.	Second, it was made clear by Value Partners that this STCDO should deliver the maximum up front yield, and that this was what the as yet unnamed client wanted. In order to achieve this, an “aggressive structure” should be adopted. This was to be contrasted with a more “moderate” (i.e. lesser risk) structure. The relationship between risk and return was therefore well understood by Value Partners and, as I find, by Mr Heininger.
188.	Third, Mr Bracy referred to Value Partners’ high level of confidence that they could “deliver the client”. In context this is a revealing and important phrase which accurately characterised the role which Value Partners was to play. It is also one which, at this stage, would have been premature if Value Partners was acting as a genuinely independent adviser to KWL with KWL’s best interests at heart. It was premature because so far (as Mr Bracy knew) Value Partners had only a limited understanding of STCDOs and had seen no information about what an STCDO tailored for KWL might look like in terms of attachment point, tranche width, portfolio names, credit rating and upfront premium. Without that information it was far too early to form a view about whether an STCDO would be in KWL’s best interests. Nevertheless Value Partners apparently felt “very strongly” that it could “deliver the client”. Taken in isolation and out of context this may perhaps appear an innocuous phrase, but in my judgment the evidence as a whole demonstrates that the arrangement between Mr Bracy and Value Partners was that the latter’s agreed role was to advise their existing clients (and subsequently even to seek out new clients for whom they would purport to act in an advisory role) to conclude STCDOs with UBS (in other words, to “deliver the client” to UBS) and to do so, moreover, regardless of whether that was in the clients’ best interests. 
189.	Fourth, the comment that “these guys have more to come as well” demonstrates that this was intended to be an ongoing arrangement, not limited to the as yet unnamed KWL, and that this had been discussed between Value Partners and Mr Bracy. It seems highly likely, viewing these early messages in the light of what came later, that the arrangement between Mr Bracy and Value Partners was in place from a very early stage.
190.	That this was how Mr Bracy and Value Partners saw their arrangement at a slightly later stage is put beyond doubt by an e-mail sent by Mr Bracy to Value Partners on 11 July 2006. It is convenient to mention this now, out of sequence, because it casts important light on the next message which Mr Bracy sent, on 10 April 2006. In the 11 July e-mail Mr Bracy sent to Value Partners a list of cross-border lease deals which he had obtained from a Mr Ed Maron. At that time Mr Maron did not work for UBS but for a different company, BTM, although Mr Bracy was hoping to and subsequently did recruit Mr Maron as his assistant at UBS. Mr Bracy saw this list as Mr Maron’s “leverage … that can lead to restructuring opportunities”. It is apparent, therefore, that Mr Bracy expected that his superiors who would be making the decision whether to offer Mr Maron a job would be made aware of the use to which he intended to put the list – this was his “leverage” to obtain employment at UBS. 
191.	Leaving to one side the fact that Mr Bracy must have realised that Mr Maron (who at that time was still employed by a competitor) can have had no legitimate business providing this list to Mr Bracy, what is significant is the use to which Mr Bracy intended that Value Partners should put this client list:
“I told him that I think it would be best if I passed this info to you guys to see where you guys would feel comfortable to approach the client about restructurings and to act as the advisor to the client this way we keep control of the process through you guys which helps ed as well as giving you guys more opportunities with respect to ubs. when you get a chance give me a call.”
192.	Thus Value Partners were to approach potential clients on Mr Maron’s list offering to act as “the advisor to the client” to restructure the client’s leases. The advice which they would then give to the client would be to restructure by means of CDSs and STCDOs, as in the case of KWL, and they would ensure that such deals were brought to UBS and not elsewhere. This would enable Mr Bracy and Value Partners to “keep control of the process” and to maximise their own remuneration at the client’s expense.
193.	For Value Partners, the remuneration would be in the form of a commission or other fee payable by its client out of the premium generated by the transaction. Mr Bracy understood that Value Partners’ remuneration for the KWL deal and any others would be very lucrative. It was not suggested, however, that he was aware of the conspiracy between Messrs Senf and Blatz and Mr Heininger to divert part of the premium from the KWL deal to Mr Heininger personally by way of a bribe.
194.	For Mr Bracy, the benefit would come from the recognition and status he would gain, as he hoped and expected, for his role in winning profitable deals for UBS, which would be reflected in his personal remuneration. 
195.	Whether such deals were in the clients’ interest was of no importance so far as Messrs Senf and Blatz and Mr Bracy were concerned. This arrangement represented a clear abuse by Value Partners of the trust which ought to exist between a client and its financial adviser of which Mr Bracy was well aware. 
196.	The significance of this email as revealing very clearly the corrupt nature of the arrangement between Mr Bracy and Value Partners had not been appreciated by KWL at the time when Mr Bracy gave evidence. Accordingly the email was not put to him in cross examination for any explanation which he might be able to offer. UBS submits that it would therefore be unfair to allow KWL to rely on it. However, Mr Bracy was extensively cross examined by Mr Lord on behalf of KWL about his relationship with Value Partners generally, including with regard to the “letter for K” episode described below. He had a full opportunity to explain what this relationship was and I have rejected his explanation. I am satisfied that there is no injustice to UBS in taking this email at face value. 
197.	The email was put to other UBS witnesses who gave evidence after Mr Bracy, namely Mr Sanz-Paris and Ms Short, neither of whom had any difficulty in recognising that it revealed a thoroughly inappropriate relationship. Mr Sanz-Paris commented that if this had been known at the time, it would have been likely that UBS would have stopped any further dealings with Value Partners. In fact, however, Mr Bracy did send Mr Maron’s list to Mr Sanz-Paris. As Mr Bracy wrote to Mr Sanz-Paris in a later email, dated 1 September 2006:
“It looks like that david shulman will hire ed maron to help me out in the states (which gives us his list to pursue with v-partners which I passed to you a couple of months ago).”
198.	I accept that if Mr Maron’s list and the use to which Mr Bracy and Value Partners intended to put it had been known at the time, it ought to have meant that UBS would have stopped any further dealings with Value Partners. I am not persuaded, however, that this would have happened. On the contrary, it seems that UBS in the person of Mr Sanz-Paris himself knew that Value Partners’ role as an adviser to prospective clients was being compromised, but chose to ask no questions about this, and that Mr Bracy’s superiors in the Municipal Securities Group were told what was proposed. As appears from Mr Bracy’s 1 September email quoted above, he had sent the list to Mr Sanz-Paris. Mr Bracy made no secret within UBS of the purpose for which Mr Maron had sent him this list. His email to Mr Sanz-Paris makes this clear. It is therefore probable that Mr Sanz-Paris and indeed others were also aware of the purpose to which the list was to be put.  
199.	Although the first of these emails about Mr Maron’s list is dated 11 July 2006, there is no reason to suppose that it represented a fundamental change in the arrangement between Mr Bracy and Value Partners. The only thing that was new in July was the access to Mr Maron’s client list, the names on which could be added to the clients which Value Partners already had. 
200.	Much later, in an email dated 22 February 2007, Mr Bracy suggested to his boss that “Value Partners has effectively been integrated into our operations internally”, that “Value Partners is an extension of our staff” (and should therefore be paid by UBS for revenue brought in), and that “we always envisioned that Value Partners (amongst others) would serve as our European staff … Frankly, the plan as we laid it out is working”. This was highly exaggerated. Value Partners was never envisaged to be a part of UBS’s staff or to be integrated into UBS’s internal operations, and those UBS witnesses who described this suggestion as absurd were correct. Nevertheless the arrangement between Mr Bracy and Value Partners for Value Partners to deliver clients to UBS was as I have described it.
201.	Returning to April, at about the same time as the 10 April 2006 email Mr Bracy sent Mr Senf a list of entities which had entered into cross-border leases. This was publicly available information, but no doubt it was convenient for Value Partners to have the list in this form. Although Mr Bracy denied this, the reason for sending this list must have been to identify potential counterparties for Value Partners to approach in order to “advise” them to conclude STCDOs with UBS. Although this was not spelled out in the same way as it was to be in the case of Mr Maron’s list, there was no other reason for Mr Bracy to send this list to Mr Senf. Value Partners responded by indicating which clients they thought it would be worth approaching. 
Value Partners’ advice to KWL
202.	UBS places some reliance on a document dated 19 April 2006 in which Value Partners wrote to Mr Heininger with advice about diversifying the risk of default by the individual defeasance providers to which KWL was exposed. After identifying those existing risks the letter described the “objective of the transaction” as being “to specifically substitute these existing individual risks with a diversified product, and thus achieve a broadly positioned risk diversification for KWL”. This seems puzzling. As already indicated, Value Partners knew that the real objective of the transaction (certainly Mr Heininger’s, to whom the letter was addressed, and for different reasons also Dr Schirmer’s, although the letter was not addressed to him) was to generate funds. The letter went on to identify “the key elements of the transaction”, namely to hedge the existing single name risks by diversification into a portfolio of 150 to 160 reference credits over a wide spread of different regions, sectors and companies, with the underlying credit quality of the portfolio “adjusted to the relevant specific risk profile of KWL” and confirmed by a rating from Moody's or Standard & Poor’s. In addition, it stated that KWL would benefit from the active management of the portfolio by a professional portfolio manager, thus allowing the substitution of individual credits, in order to be able to react to changes in the rating of individual credits or even industrial sectors. In this way, said Value Partners, “it is guaranteed that the credit quality remains constant and improves constantly throughout the loan period”. Finally, the letter added, as if this were not the real driver for KWL’s interest in this transaction:
“Furthermore, the incorporation of the CDO structures increases the underlying rates of return, compared to the present individual debtors. An increase in value is mainly achieved as a result of the efficient capital structure.”
203.	There was no reference to the amount of increased return which might be expected or to the fact that it could all be paid upfront, despite what Value Partners had already told Mr Bracy about KWL’s requirement (see [184] above). 
204.	Although UBS relies on this letter as demonstrating that it was not UBS who initiated the transaction and that Value Partners provided independent advice to KWL, in my view caution is needed in assessing this letter which was written by two dishonest people (Messrs Senf and Blatz) to another (Mr Heininger) and cannot necessarily be taken at face value. In particular, the subsidiary role in the proposed transaction attributed to an increased return, when in fact this was the principal motivation for the transaction and was a factor which Value Partners continued to emphasise in its dealings with UBS even when it was made clear that an increased return would mean greater risk, raises a question as to the real purpose of this letter. It was found by the German court to have been a later concoction. Although this was not (and could not really have been) explored in the evidence before me, in view of the oddities identified above that finding seems likely to be correct.
Initial discussions involving the London deal team
205.	As already noted, Mr Bracy turned to a colleague, Mr Sanz-Paris, for assistance in putting the transaction together. This led to a deal team being assembled, led by Mr Czekalowski, with Mr Sanz-Paris having principal day to day responsibility. 
206.	On 21 April 2006 there was a conference call between Mr Bracy, Mr Sanz-Paris and Mr Mehta of UBS and Mr Senf and Mr Blatz. Mr Senf then emailed Mr Bracy:
“It was great talking to you and your London guys. I am sure we will make a lot out of it. Just for your info: Our client is very much money minded - so please make sure your colleagues are pricing very competitive and fast. I am firmly believe if this is the case we get the clients go ahead already by next week.”
207.	Mr Bracy replied:
“Richard want to put together the party!”
208.	This is another revealing exchange, confirming that Value Partners and Mr Bracy saw the transaction as very lucrative (“sure we will make a lot out of it”). Together with the reference to Richard putting together a closing party, the flavour of this exchange is that Value Partners and Mr Bracy saw themselves as working together to “deliver the client”, for which they would all be handsomely rewarded. Richard was Richard Isgard, a lawyer friend from their CSFB days who had nothing to do with this transaction but whose role appears to have been to arrange for strippers to entertain Messrs Senf and Blatz from time to time when they visited Mr Bracy in the United States. It is apparent, therefore, that Messrs, Senf, Blatz and Bracy were already confident that they would be able to make the transaction happen and were joking about a celebratory closing party together, even though they had not yet even begun to discuss terms. It is apparent also (and was apparent to Mr Sanz-Paris to whom Mr Bracy forwarded Mr Senf’s email) that Value Partners’ priority (which it attributed to the client) was not low risk but high premium.
209.	Mr Sanz-Paris and Mr Mehta, to whom Mr Bracy forwarded this email, said in evidence that they did not remember it. Nevertheless they suggested that they would have understood the reference to “competitive pricing” as showing that Value Partners was shopping around different banks to get the best deal for its (still unnamed) client. However, the email is not necessarily to be understood in this way. A request for competitive pricing is equally capable of meaning (and in my judgment did mean) no more than that UBS should quote the highest possible premium. I do not accept that Mr Sanz-Paris and Mr Mehta understood it at the time as meaning that they were in competition with other banks. There was no evidence of any real competition and the cosy relationship between Value Partners and Mr Bracy makes it unlikely that Value Partners was indeed shopping around. Value Partners was later to confirm to Mr Bracy that it was not.
210.	On 24 April 2006, Mr Bracy forwarded to Value Partners a presentation prepared by Mr Mehta giving a “summary overview of CDSs and CDOs”. The presentation explained how a CDO with a synthetic portfolio could be structured in tranches so as to create a variety of risk and return profiles.
211.	On 25 April 2006 Mr Mehta provided Value Partners with indicative pricing for a restructuring of the FW2 (or MBIA) note based on an AA-rated CDO as envisaged in Value Partners’ email dated 11 April. Although stated to be very provisional, this indication showed that after the cost of the single-name CDS, fees and other costs, KWL could expect to receive a net upfront premium of US $4-5 million. This did not go down well with Mr Senf, who queried whether it constituted “aggressive pricing” as requested. Mr Bracy commented to Mr Senf that UBS could show results that would increase the value upfront but with slightly higher risk (“we could go into lower rated paper … we can show results that could increase the 4-5 million upfront but with slightly higher risk. Maybe 20-30 percent higher”). The fact that higher premium meant higher risk, if not already obvious, was here spelled out.
212.	On 26 April 2006 Mr Heininger (but not Dr Schirmer) signed a letter formally engaging Value Partners "to act as [KWL's] advisor with respect to KWL's contemplated restructuring and optimisation of its currently existing cross-border lease portefeuille (the ‘Transaction’) in form of a managed synthetic CDO/CDS". The engagement letter stated that Value Partners would be paid a success fee of "3.5% of the notional trading volume of the underlying cross-border leasing portefeuille (approx. USD 225 MIO)” – in other words, a very healthy fee of US $7.875 million. 
213.	On 27 April 2006 Mr Blatz emailed Mr Bracy, Mr Sanz-Paris and Mr Mehta identifying KWL as Value Partners’ client. So far as the documents go, this was the first time KWL had been identified, though it seems likely that Mr Bracy had been told this already. At about the same time Value Partners suggested a “kick off meeting” with KWL, which was arranged for 9 May.
Value Partners requests payment for recommending UBS GAM
214.	One of the matters to be decided was who would manage the CDO portfolio once the STCDO was concluded. This would be for KWL to decide, advised as necessary by Value Partners. In view of the fees which could be charged for such management, this could be a valuable role. Value Partners was clearly aware of this and sought to exploit the influence which it would have in choosing the manager. On 28 April 2006 Mr Blatz emailed Mr Bracy suggesting that Value Partners was “in a position to promote UBS as being the CDO manager over the term - of course, we would expect to receive a fair compensation for that!” Picking up on Mr Bracy’s earlier joke about the closing party which the lawyer Richard Isgard would arrange, Mr Blatz added that “Of course, that would also increase the pot we can spend for our closing party”.
215.	This was obviously a proposal which should never have been made – that Value Partners should be paid to recommend UBS GAM as the portfolio manager. When Ms Short was shown this in the course of her evidence, she had no hesitation in referring to it as corrupt, as indeed it was. When Mr Bracy was asked about it, he said that he did not understand that any payment would be kept secret from KWL and that he had no idea what was meant by the pot for the closing party. This was untruthful. Mr Bracy knew precisely what the “pot” was and, even though Mr Blatz was probably not to be taken literally in saying that this was how any “compensation” would be spent, the reference to spending the compensation on a closing party to be arranged by Richard Isgard made clear that this was money which KWL was not going to hear about or benefit from. It illustrates further the way in which the interests of Mr Bracy and Value Partners were aligned in ensuring that the deal was done and did not correspond with KWL’s interests.
216.	Value Partners’ request for such “compensation” was evidently meant to be taken seriously. It was followed up in a later e-mail from Mr Senf asking for a response. Mr Bracy passed the suggestion on to Mr Sanz-Paris who discussed it with Mr Czekalowski. Eventually on 2 May 2006 Mr Bracy responded to Value Partners that payment for the promotion of UBS GAM involved an “appearance of impropriety” and therefore could not be considered. Ms Short’s evidence was that Value Partners’ suggestion represented a breach of its fiduciary duty to KWL which ought to have caused the UBS deal team to have nothing more to do with Value Partners. I accept that evidence as demonstrating the response of an honest and fair minded banker in a control function. Mr Mark Northway of LBBW, another honest and fair minded banker in a business role, said that he regarded Mr Blatz’s proposal as “highly inappropriate as it put Value Partners in a position in which it was prioritising its own interests above those of its client, KWL” and that if he had known about this he would, as a minimum, have required confirmation from KWL that it was informed of, and comfortable with, its adviser's resulting conflict of interest. It is therefore striking that Mr Bracy was prepared to pass the suggestion on within UBS rather than squashing it straight away and that Mr Sanz-Paris too saw nothing seriously wrong with it. He described it in evidence as merely “cheeky” rather than as indicative of a more serious problem. 
217.	It would clearly have been preferable if the UBS deal team had determined at this point, as Ms Short would have done, to have nothing further to do with Value Partners. At the very least, however, this episode ought to have alerted the UBS deal team, in particular Mr Czekalowski and Mr Sanz-Paris, to the fact that Value Partners was prepared to act contrary to the interests of the client which it purported to represent, and was happy to be paid by both parties to the proposed transaction. The episode illustrates the blunting of sensibility on the part of members of the UBS deal team, who were quite content to continue to deal with Value Partners on this highly lucrative transaction and did not even think of ensuring that KWL was aware that this request had been made.
218.	In due course UBS GAM was chosen as the portfolio manager. Although no payment was made to Value Partners, it is clear from the documents that there was no serious consideration by Value Partners of any other candidate albeit that two other managers, Fortis and Prudential, were asked to quote. It is clear too that the choice of UBS GAM was promoted by the UBS deal team, and that the choice was made before negotiations took place to determine what level of fees UBS GAM would charge. The later claim by the deal team in their submission to the UBS Credit Risk Committee that UBS GAM had been selected independently and without the involvement of the deal team was not true. Nor in my judgment was Mr Czekalowski’s evidence that he would actually have preferred a different bank to manage the portfolio.
Mr Bracy’s view of the Value Partners relationship
219.	On 3 May 2006 Mr Bracy spoke to Mr Senf and agreed that UBS would provide figures showing different levels of premium with the ratings that could be achieved. He followed this by forwarding to Mr Blatz and Mr Senf a draft term sheet together with a spreadsheet showing the “transaction economics”. This set out the gross and net benefits to be anticipated from the proposed restructuring, with a projected total net benefit to KWL of just under US $19.5 million, although this was based on a funded restructuring rather than a synthetic STCDO portfolio. He explained that the figure of US $19.5 million was based on AA-rated CDOs but that “if the client desires to see an approximately $30 million benefit (or greater)”, UBS could and would show them that number, although “the rating for such a return on the CDO would be lower than AA (probably A or A+).” He went on to explain that UBS would prepare a matrix showing the return available at different ratings and that “This way it could be demonstrated to the client that we can achieve in a managed portfolio a range of economic benefit depending on the rating and risk profile the client desires.” Once again, therefore, the relationship between premium and risk was explicit.
220.	Mr Bracy’s email continued:
“Frankly, you guys have their [i.e. UBS’s] attention and assuming we can work out our internal issues, you could be an exclusive finder for clients for us (basically, you can have a unlimited list of folks to market because you would have proven your credibility and why would anyone argue that result (private conversation between me and Oscar that we would both argue to our bosses that you guys should have first pick over potential clients as opposed to our internal coverage bankers) to do this, Oscar and I feel we can give up revenue (or groups) to pay the European coverage bankers on ‘your’ deals to make them happy so they can't complain if they are getting paid too.”
221.	Thus Mr Bracy was envisaging a future role for Value Partners whereby it would act as “an exclusive finder for clients” for UBS, with priority over UBS’s own internal marketing department. Any such role was obviously inconsistent with Value Partners acting as an adviser providing independent advice to potential counterparties. Mr Bracy’s evidence was that this was “just talk” and to a large extent it was, as the idea that UBS’s own marketers would acquiesce in such a formal relegation of their own position was fanciful. Mr Sanz-Paris was at pains to say that the suggestion did not make sense to him and that there had been no conversation with him as described by Mr Bracy, who was either making it up or had misinterpreted him. I accept that is so. However, Mr Bracy must have intended – and believed -- that the suggestion would be taken seriously by Value Partners. He would not have written an e-mail which he knew that Mr Senf and Mr Blatz would disregard as hopelessly unrealistic or which would make him look silly in their eyes. 
222.	At about the same time Mr Bracy forwarded to Value Partners an exchange of emails with a UBS analyst in Washington in which he had requested information about legal and political developments regarding cross-border lease arrangements which he could pass on to Value Partners. He referred to Value Partners as a firm with which UBS had a “strategic relationship”, and asked for regular updates which could be transmitted “to our collective clients as we are expanding our joint initiative in Europe”. By itself a request for such updates would be entirely innocuous, but in the context of Mr Bracy’s other dealings with Value Partners described above it appears that he saw Value Partners as working with him to bring business to UBS and wanted Value Partners to be aware of this. Indeed the only expanding “joint initiative” with Value Partners in Europe was the arrangement whereby counterparties to whom Value Partners was supposedly providing independent advice would be delivered to UBS for the conclusion of lucrative STCDOs.
223.	Mr Bracy also emailed his boss in UBS’s Municipal Securities Group to explain what he was doing. He referred to Value Partners as having “several captive clients in the European municipal sector (rail operators, utilities, etc) … (basically they have a few significant clients that will do what they recommend).” He continued: 
“They were aware of our initiative in Europe with respect to lease restructurings and we felt it could be mutually beneficial. They have secured a couple of mandates from clients (KWL water utility in Leipzig, Germany and as well, with others that would follow with CDO transaction volume of $500 million US”. 
224.	This was information that could only have come from Value Partners. Mr Bracy said in evidence that the expression “captive clients” referred merely to good clients who valued Value Partners’ advice, but I consider that Mr Bracy’s contemporary language is a better reflection of the way he actually saw the relationship between Value Partners and its clients and that the sense of this (and probably even the language used: “captive clients … that will do what they recommend”) reflects what Mr Senf and Mr Blatz had told him. (Indeed in a later email, dated 24 April 2007, Mr Bracy contrasted the “control” which Mr Senf had over KWL with his relationship with another potential client). The parties to whom the relationship was to be “mutually beneficial” were UBS and Value Partners. Once again, it is evident that Mr Bracy saw the relationship as one in which UBS and Value Partners would work together to deliver the latter’s “captive clients” to UBS for STCDO transactions with a total expected transaction volume of US $500 million. His purpose in writing was to ensure that his boss knew what he was doing and to ensure that his efforts on behalf of UBS were appropriately rewarded by what he described as “an equitable split of firm revenue”. He was not, therefore, on a frolic of his own unknown to more senior management. On the contrary, he was anxious that his superiors should be aware of – and should ensure an appropriate reward for – the work he was doing on behalf of UBS.
Preparation for the 9 May 2006 “kick off” meeting
225.	On 4 May 2006 Mr Senf emailed Mr Bracy with some information about Mr Heininger and Dr Schirmer who would be attending the 9 May meeting. He explained that the meeting needed to give Mr Heininger especially “the confidence in the product (I think we will pick the synthetic way) and in the timeline”. This too is language suggesting that Value Partners saw themselves as working together with Mr Bracy to persuade KWL to do the deal. Mr Senf went on to instruct Mr Bracy:
“Don't talk about absolute numbers and if, always gross numbers before cost. The product should be explained in general and not related to a specific deal. Later on he decides how we start and what he wants to get done until end May, beginning of June. It is important to explain the advantages of the product (multiple credit risk versus single credit risk ... ). In addition to that you should mention other clients and closed deals.” 
226.	This seems an odd instruction. Previously Value Partners had emphasised its client’s “high yield minded” and “very much money minded” approach and the importance of “competitive” and “aggressive” pricing. Clearly that was based on conversations with Mr Heininger. Risk management had not featured as a significant priority. Now it was telling UBS to avoid mentioning figures and to emphasise the advantages of an STCDO for managing risk. The inference must be that it did not want Dr Schirmer, who was making a first appearance in the negotiations at the proposed meeting and who was described rather dismissively by Mr Senf as speaking English badly and coming because he “just want to be part of the party”, to hear figures which would indicate what premium KWL could expect to receive. There was certainly material provided in the course of the negotiations from which Dr Schirmer could have discovered the amount of the proposed premium, and there was nothing to stop him from asking any question he wanted to, but it does appear that Value Partners sought to keep him so far as possible in the dark about some important aspects of the transaction and succeeded in doing so. 
227.	On 8 May 2006 Mr Mehta prepared some indicative pricing which he sent to Value Partners as previously promised by Mr Bracy. This showed a projected benefit to KWL of US $16.9 million if KWL invested in Aa3/Aa2 tranches (for the BB, FW2 and WW1 notes) or alternatively a premium of US $34 million at a lower rating of A3/A2. Separately, Mr Mehta also sent a presentation for use at the meeting the following day. Once again the risk/return relationship was obvious.
The 9 May 2006 meeting
228.	The meeting on 9 May 2006 took place at UBS’s offices in London. It was attended by Mr Heininger and Dr Schirmer of KWL, and by Mr Senf and Mr Blatz of Value Partners. For UBS, Mr Sanz-Paris, Mr Mehta and Mr Bracy attended. Mr Czekalowski may have been present for part of the time, although no one (including him) was able to say positively whether he was. It is KWL’s case that a number of misrepresentations were made by UBS at this meeting. I shall need to return to this topic at a later stage. 
229.	Evidence was given by all of the UBS attendees and by Dr Schirmer. Not surprisingly, none of the UBS witnesses had any real recollection of the meeting, although they were confident that they would not have made any of the representations alleged to have been made. Dr Schirmer’s evidence demonstrated that he failed completely to understand what was being said at the meeting, which was conducted in English, a language he did not understand. His understanding, such as it was, was derived from occasional summaries provided in German by Mr Heininger. In those circumstances it is in my view safe to conclude that the UBS representatives worked through the presentation which Mr Mehta had prepared, but for the most part it is not possible to go any further than this with any degree of confidence.
230.	The presentation began with an executive summary which described UBS’s understanding that “KWL would like to explore the possibility of replacing its current lease defeasance assets with more efficient alternatives that enable diversification of the credit exposure and yield enhancement”. Thus the twin goals of “diversification” and “yield enhancement” were given equal prominence. It listed the benefits of investing in a CDO as follows:
“-  Limit the Value at Risk per credit, reducing single credit event risk
-	Maintains high credit quality (or alternatively can be adapted to suit KWL's risk/reward appetites)
- 	Provides a more cost efficient solution and enables monetisation of enhanced yields as upfront cash benefits 
- 	Is a solution that is actively managed and controlled by professional, global portfolio managers thereby enabling greater rating stability 
- 	Provides continual flexibility to adjust risk profile.”
231.	It added that:
“The restructuring will provide KWL with a tailored and structured CDO investment that allows ongoing flexibility to manage the risk profile and realise an upfront cash benefit.”
232.	The presentation went on to describe these benefits in greater detail. Under the heading “Diversification of risk” it stated that:
“Risk exposure of any single name credit is removed, and replaced with diversified portfolio of credits, thereby reducing unsystematic risk
Risk exposure is thus diversified across regions, sectors and corporates.”
233.	The presentation described the “enhanced yields compared to like rated single credit investments” and the benefit of active portfolio management “to ensure the credit quality of the investment is maintained over time”. It went on to describe in further detail the way in which an STCDO worked, including that mezzanine tranches would be exempt from losses until the equity tranche had been written off, but stating also, by reference to an example of an AA rated mezzanine tranche with an attachment point of 4% and a tranche width of 2% that:
“Should losses in the portfolio accumulate beyond 4% (I.e. more than 6.7 defaults assuming [40%] recovery rate), then the investor's capital begins to write down 
- The investors capital would be fully written down when the losses in the portfolio accumulate beyond 6% (equivalent to 10 defaults) 
The tranche would be rated [Aa] as rating agencies assess that the probability of incurring 4% or more losses in the portfolio is very low, and commensurate to a [Aa] rating investment.”
234.	It was therefore clear from the presentation as a whole, or should have been, that: 
a.	there was a balance to be struck between “high credit quality” and “upfront cash benefits”;
b.	precisely how this balance was struck would depend on “KWL’s risk/reward appetites”;
c.	the rating to be awarded to the tranche would likewise depend on how this balance was struck;
d.	KWL would lose its entire investment if a sufficient number of defaults occurred;
e.	however, at any rate for an Aa rated tranche, the probability of this occurring was assessed by the ratings agencies as very low.
235.	I see no reason to doubt that Mr Heininger understood all of these points.
236.	Dr Schirmer (whose evidence about the meeting was based on the occasional summaries in German which Mr Heininger gave him) said that before the meeting he had no concept of what a CDO was, but that by the end of the meeting he understood it. However, the understanding which he claimed to have, that KWL would have a portfolio of bonds and other securities which would produce an annual income of 6% to 8%, that it would be UBS who would bear the risk of the portfolio losing its value, and that the only risk for KWL would be the insolvency of UBS, bears no resemblance to anything which UBS could possibly have said. It is apparent that, unless Mr Heininger deliberately misled him, Dr Schirmer failed completely to understand what was being said. UBS described his evidence, with justification, as a grotesque misstatement of what the transaction was about, but a misunderstanding which did not come from anything said by UBS. I accept that Dr Schirmer’s understanding of the transaction was substantially as he described. His description was too bizarre for him to have made it up.
237.	Dr Schirmer went on to say that following the meeting he accepted an invitation to see UBS’s trading room where he chatted to a German speaking trader and was impressed by the sophistication of UBS’s operations. That gave him confidence in UBS’s ability to generate an annual return of 6% to 8% from the portfolio. Following the meeting, and probably on the plane home, he told Mr Heininger that he had a good feeling about the proposed transaction and was willing to go ahead. 
238.	It is extraordinary that Dr Schirmer should have made this decision based on a presentation in a language which he did not understand (which he had in fact completely misunderstood) and a short chat with a trader sitting in front of an impressive looking computer screen who had nothing to do with the proposed transaction or the future management of the portfolio. Nevertheless his evidence is that this is exactly what he did, although he also referred to a short meeting which he said that he and Mr Heininger had with Value Partners in Leipzig later in May, saying that he relied also on what he was told by Mr Senf and Mr Blatz in this meeting. There is, however, no contemporary record of such a meeting and Dr Schirmer’s evidence about it was too vague and confused to enable any reliable factual findings about it to be made. 
239.	One point not in the presentation which was also discussed and agreed at or immediately after the 9 May meeting was that UBS GAM would be appointed as the portfolio manager. This must be so, because only the next day Mr Sanz-Paris circulated a proposed time line which included the appointment of UBS GAM on 12 May 2006 and the formal execution of all the contract documentation on 8 June 2006. Although the appointment of UBS GAM was not formally made on 12 May in accordance with this timeline, there was no further consideration of this question and it is apparent that the decision had been made.  
240.	The other point not in the presentation is that Mr Heininger, or possibly Value Partners with Mr Heininger’s assent, said that KWL wanted to close the transaction by 9 June 2006, before the beginning of the football World Cup, which was to take place in Germany that year. This deadline was later brought forward to 8 June and then 7 June.
241.	Mr Bracy, keen as ever to ensure that his contribution to the deal was recognised, reported the outcome of the meeting to his boss:
“The current trade that I brought in on KWL, which we got the mandate today for a firm June 9th closing (client want to close before the start of the World Cup) is expected to bring revenues to the firm of 25-30 million, assuming we can get through the usual complications.”
242.	The “usual complications” to which Mr Bracy referred consisted of obtaining approval for the deal from UBS’s own internal control functions. Mr Bracy and others in the deal team regarded this necessity as something of a nuisance. They understood that for this purpose it would be important to emphasise the risk diversification aspects of the STCDOs. Certainly the view of UBS’s CRC would have been that an essentially speculative transaction designed primarily to achieve an upfront cash premium for KWL which exposed it to even a modest risk of liabilities running into hundreds of millions of dollars would have been a thoroughly unsuitable transaction for a municipal water company. 
243.	In my judgment the need to obtain UBS’s internal approval for the deal largely explains the increasing emphasis on risk reduction which appears in the documents from this time. These were not statements intended to persuade KWL. Mr Heininger and Value Partners had already made clear that their main priority was upfront cash and were about to do so again. Rather they were statements designed to overcome or sidestep the anticipated “usual complications”. This appears with particular clarity in the briefing of Mr Heininger for a due diligence meeting with CRC on 30 May 2006 (see [286] to [289] below).
244.	Following the meeting, on 10 May 2006, Mr Bracy sent a follow-up email to Mr Sanz-Paris and Mr Mehta reporting that he had spoken to Value  Partners who “once again expressed the desire to receive 30 bucks”, that is to say a premium of US $30 million. Mr Bracy said that he had explained that this would only be possible if the tranche for the Balaba STCDO was rated A (rather than AA, in accordance with the example which had been used in the presentation at the meeting). He reported that Value Partners’ response was that this “has already been decided”. This decision must have been made by Value Partners and Mr Heininger following the 9 May 2006 meeting.
245.	It was therefore apparent to UBS that KWL had determined that it had a minimum cash requirement of US $30 million and that it had decided to accept a lowering of the rating on the Balaba STCDO from AA (as originally discussed) to A in order to achieve this. Subsequently, on 19 May 2006, Mr Sanz-Paris sent an email to Mr Senf and Mr Blatz in which he pointed out that KWL was “moving from a 30 year AAA asset to a combination of a (AA 10yr + AAA 20yr)” and that this “might not conclude in a reduction of risk (as per agencies)”. It was thus made explicit to KWL that the Balaba transaction would not necessarily result in an overall reduction of risk, at any rate as assessed by the ratings agencies. Value Partners understood this and I see no reason to doubt that Mr Heininger did too.
246.	Some UBS witnesses (such as Mr Lancaster, who was not at the 9 May 2006 meeting) were prepared to accept in cross examination that they “understood this transaction to be presented by UBS to KWL throughout as overall reducing risk”. Mr Linfoot and Mr Bunce also accepted this. However, these witnesses were not at the 9 May 2006 meeting either. Mr Linfoot was part of CRC while Mr Bunce was part of UBS’s top management. They did not see the way in which the transaction was presented to KWL and were not privy to Mr Bracy’s conversations with Value Partners. They only saw how it was presented to the CRC. Despite the witnesses’ acceptance of this proposition, I do not accept it. It simply does not accord with the contemporary documents.
Mr Kraus’s German language presentation
247.	Also around this time, it appears that Value Partners requested that UBS prepare a German-language description of the proposed transaction. Why this was needed is not clear. Although such a presentation was prepared by Mr Tilo Kraus of DCM (who had just been added to the UBS deal team) and was sent to Value Partners on 15 May 2006, Value Partners did not send it on to KWL but instead used it as the basis for a document of their own (called “Beschreibung UBS Produkt” or “Description of UBS product”), which they sent to Mr Heininger and Freshfields on 18 May 2006. Mr Senf emphasised to Freshfields, whose role was to advise KWL and also to prepare a capacity opinion for UBS, that their assessment should focus on the “optimisation” of existing contracts.
248.	Mr Kraus’s presentation was described as “a short paper outlining the benefits of a CDO strategy in a leasing context”. It described the various “risk minimising” objectives of such a restructuring, an expression which is relied on by KWL as demonstrating the way in which UBS presented the transaction to KWL. As Mr Kraus’s presentation itself was never forwarded to KWL, KWL cannot rely on the statements contained in the presentation itself as constituting representations made to it, but it does suggest that the statements in the presentation constituted evidence of what would have been represented to KWL at the 9 May 2006 meeting. I do not accept this. The author of the presentation, Mr Kraus, had not been at the 9 May meeting and at that time had not even been a member of the deal team. Although he must have been briefed by members of the deal team in order to write his presentation, there is no proper basis on which to conclude that his “risk minimising” language was what the UBS representatives had said at that meeting. I should also note that his presentation also referred to achieving a “present value” from the transaction of approximately US $20 to US $30 million. Thus, despite the Value Partners’ request that “numbers” should not be mentioned at the 9 May 2006 meeting, the approximate level of expected benefit (albeit described in terms of “present value” rather than upfront cash) was stated in this document which Mr Kraus expected to be provided to KWL.
249.	Mr Bracy explained to Value Partners in an email dated 15 May 2006 who Mr Kraus was:
“One other thing amongst ourselves. Oscar and his team is working very hard on this and we have everyones attention. The person who did the german translation is one of the european marketers but he can be trusted as oscar and I have pulled him aside as to what our future plans with you guys are (tilo kraus, he reminds me of a young juergen blatz). He can be trusted and is on our side.”
250.	It appears that in fact Mr Bracy had not yet pulled Mr Kraus aside for a confidential explanation of his and Value Partners’ “future plans” and it may be that he never actually did so. Nevertheless this is an example of Mr Bracy emphasising to Value Partners that the business in which they were working together, and the benefits of such business, would extend far beyond the KWL transaction.
Beating up Mr Cox
251.	One element of the transaction costs consisted of UBS’s “collateral hedge costs”. These were costs in connection with the single name credit default swaps. On 16 May 2006 Mr Julian Cox of Value Partners asked for a breakdown of the costs which UBS proposed to charge, commenting that the figures so far provided “seem wildly excessive for the credits in question”. This innocent query (it was after all to be expected that an independent adviser would scrutinise and if appropriate challenge UBS’s figures where it could in order to negotiate the best possible deal for its client) provoked a strong reaction from Mr Cox’s colleagues at Value Partners and from Mr Bracy. Mr Senf sent an urgent message for Mr Bracy to call him, which Mr Bracy did. He set out the results of the call in an email to Mr Sanz-Paris and Mr Mehta:
“Guys, don't be too alarmed by Julian's e-mail. I spoke to Berthold and he has instructed me to do the following: for now on all pricing information is to go directly to Him and Juergen Blatz, we will let them handle Julian. The fact with Julian is that he is sensitive that his ‘intellegence’ on pricing matters is not being respected (generally, not specifically to this deal), as he is the ‘numbers’ person in their shop. The fact is that they are not talking to anyone else about doing the deal. He got his information from a guy at csfb who does not have the full picture. I am not suggesting that Julian is to be ignored and that his points should not be addressed. However, that is Berthold's and Juergen's problem which they know and want to manage within their shop. Also, they are the ones who are talking to the client directly (not Julian) as he will not be joining them in NY next week as well. Frankly, they had no idea he was going to send the e-mail so it caught them of guard as well, as I mentioned earlier that we had a very productive conversation before Julian weighted in.”
252.	While this was going on it appears that Mr Sanz-Paris spoke to Mr Cox and provided some answers to his questions. He reported this to Mr Bracy, expressing confidence that UBS would always have the right answers to such questions. Mr Bracy responded:
“You’re very good.”
253.	Two days later Mr Senf sent an e-mail reassuring Mr Bracy that Mr Blatz had spoken to Mr Cox and that “everything ok!!!” Mr Bracy passed this on to Mr Sanz-Paris, joking:
“Anyone else you want me to beat up?”
254.	The flavour of these exchanges is that Mr Bracy and Mr Sanz-Paris were congratulating each other on having seen off the interference by Mr Cox.
255.	Several points emerge from this incident. First, it is apparent that Mr Cox’s challenge to the UBS quoted figures was highly unwelcome, not only to Mr Bracy but to Mr Senf and Mr Blatz as well. For them it prompted something close to panic, lest his intervention jeopardise the deal. 
256.	Second, it is equally apparent that Mr Cox (who appears not to have been part of the arrangement between Mr Bracy on the one hand and Messrs Senf and Blatz on the other) was sat upon by Mr Senf and Mr Blatz to make sure that he did not cause further trouble. In the event he did not. These points confirm the picture of Messrs Senf and Blatz working together with Mr Bracy to ensure the smooth conclusion of the deal regardless of KWL’s interests.
257.	Third, the confirmation that KWL and Value Partners were “not talking to anyone else about doing the deal” was extremely valuable information, as Mr Czekalowski’s and Mr Adam Johnson’s evidence made clear (see e.g. [130] above). It left UBS free to maximise its profit from the deal free of any competition from another bank. Although Mr Bracy and Mr Sanz-Paris tried to suggest that if KWL had been talking to other banks about this deal, they would not have thought it worthwhile to spend their valuable time working on it, and therefore (by implication) that it was in KWL’s interests to tell UBS this in order to demonstrate KWL’s commitment to the deal, I do not accept this. 
258.	Fourth, all this was clear to Mr Bracy and Mr Sanz-Paris. Mr Bracy already knew that Mr Senf and Mr Blatz were not seeking disinterestedly to achieve the best possible deal for KWL. If Mr Sanz-Paris was still in any doubt about this after the request to be compensated for promoting UBS GAM, this incident must have removed that doubt.
The shadow Standard & Poor’s rating 
259.	The information which UBS would need for its internal credit approval of the deal included information about KWL’s credit rating. KWL had received a shadow rating of A- from Standard & Poor’s in February 2004 and a further lower rating of BBB+ in October 2005. On 16 May 2006 Mr Senf emailed both of these to Mr Bracy, combined in a single PDF document. He added the comment that the downgrading had nothing to do with KWL itself, but was due to its shareholder LVV, and that Mr Bracy should therefore “use the papers however you want”. Mr Bracy acted on this suggestion by causing the two ratings to be split into two separate documents and passing on only the out of date higher rating to Mr Sanz-Paris. This rating then featured reasonably prominently in the deal team’s application for approval of the deal.
260.	This was blatant dishonesty on the part of Mr Bracy, intended to deceive CRC. He knew that he would be asked about this at the trial and must have thought about what he was going to say, but the best answer that he was able to give was that although he could not recall why he had done this, he was sure that there was a good reason. However, he could not think of anything that would have constituted such a good reason. Other UBS witnesses, in particular Mr Bawden, said that Mr Bracy would have been fired if what he had done had been known. Certainly he should have been. There is, however, no evidence that Mr Bracy revealed what he had done to anyone else at UBS and it seems unlikely that he would have been so foolish as to do so. 
The meeting with Wilmington Trust in New York
261.	As early as 24 April 2006 Mr Bracy had approached an old friend from his college days, a Mr Chris Sponenberg of Wilmington Trust in the United States, which had played a role in holding funds related to KWL’s cross-border leases. Mr Sponenberg also knew Mr Senf and Mr Blatz. The proposed role of Wilmington Trust in the STCDO transaction was to open an account to hold the premium which the STCDO would generate. In the event such an account was set up, over which Mr Senf and Mr Blatz held a power of attorney enabling them to withdraw funds without reference to KWL. It was this which enabled them in due course to remove the funds for their own benefit.
262.	The involvement of Wilmington Trust provided an excuse for Messrs Heininger, Senf and Blatz to visit New York. Mr Bracy was keen to use this opportunity to ensure that Mr Senf and Mr Blatz met one of his superiors in the United States, to whom he commented that:
“ … Berthold and Juergen will be accompanying the client on the trip and frankly, relative to our ‘coverage’ with the DCM bankers there is no comparison. These guys directly or through client referrals ‘own’ Germany and Switzerland with respect to the public marketplace. I have spoken to them about your initiative in Europe and they would have no problem setting up meetings with their client base to advance the initiative.”
263.	Mr Bracy forwarded this email to Mr Senf and Mr Blatz, thus spelling out to them again that he saw their role as extending well beyond the KWL transaction and as being a very valuable part of a UBS marketing initiative, bringing their clients to UBS.
264.	The same email also revealed Mr Bracy’s attitude to KWL:
“If possible, I would love for you to stop by to meet the client and their advisors for several reasons. When we were in London, we showed them the trading floor which they liked (they like to be made to feel like they are important). it would be great if you could show them our operations on our floor as well, to make them feel important.”
265.	Mr Bracy was probably not the only banker to have this rather condescending attitude to a counterparty (referred to here and elsewhere, not altogether accurately, as a “client”), although Dr Schirmer’s evidence referred to at [237] above suggests that Mr Bracy had judged his man correctly. However, the fact that he felt able to forward this email to Mr Senf and Mr Blatz who were supposed to be representing KWL suggests that he saw himself and Value Partners as being essentially on the same side, able to joke together about the naivety of KWL, in bringing the transaction to a conclusion.
266.	The visit to New York duly took place on 22 May 2006. Mr Heininger made clear again that he wanted the transaction closed by 7 June. Mr Senf and Mr Blatz emphasised that point, telling Mr Bracy to “get your troops running and fighting”.
Formal engagement of UBS and UBS GAM
267.	Once it had been determined that the transaction was to go ahead, it was necessary to formalise the engagement of UBS and UBS GAM. Draft documents were prepared on 12 May 2006, but they were only executed on 24 May. Meanwhile, the fee which UBS GAM would charge had to be negotiated. It is apparent from the exchanges about this that UBS, in particular Mr Sanz-Paris, was promoting the appointment of UBS GAM. Indeed an internal email from Mr Dattani commented that:
“The IB [investment bank] will always try to get the best for us because internally there are brownie points for doing deals internally. These things are important to the MDs at the IB.”
268.	Although UBS witnesses denied this (indeed Mr Czekalowski said that he would have preferred an external portfolio manager), I see no reason to doubt the accuracy of this comment. 
The Engagement Letter
269.	Various documents were signed on 24 May 2006. First there was an Engagement Letter, signed by Mr Heininger and Dr Schirmer on 24 May 2006 and by Mr Sanz-Paris and Mr Lancaster on about 30 May 2006. It was stated as confirming “our understanding concerning the proposed project to restructure current lease defeasance assets with a more efficient alternative (the ‘Product’), with the main objective to diversify KWL's credit exposure” and appointed UBS “as exclusive structurer and swap counterparty”. A number of conditions precedent to the closing of the transaction were set out, including at paragraph 3(ii) that:
“on the Closing Date, all necessary approvals and consents, including any governmental and regulatory approvals and/or consents and any legal opinions (as may be reasonably required by UBS and/or the Manager and/or KWL and/or the relevant rating agency with respect to the Transaction) shall have been obtained, in form satisfactory to UBS, the Manager, KWL or any rating agency, as the case may be.”
270.	Separately paragraph 8 of the Engagement Letter contained representations and warranties by KWL as follows:
“KWL represents and warrants to, and agrees with UBS as follows: 
(a) This Agreement has been duly and validly authorised, executed and delivered by it or on its behalf, and shall constitute its valid and binding obligation enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganisation or other similar laws relating to or affecting creditors' rights generally, to general equitable principles, and to an implied covenant of good faith and fair dealing. 
(b) It is a sophisticated party with sufficient expertise to evaluate the risks and merits of any structure developed in connection with the Transaction. Without limiting the foregoing it has engaged or will engage (at its own expense) competent tax counsel, legal counsel and accountants to advise on such risks and it will rely exclusively on its own assessment of such risks. It is not relying on any communication written or oral of the other party as investment advice or a recommendation to enter into any Transaction in connection with this Agreement.”
271.	KWL also undertook an obligation to engage accountants to advise it, although in the event did not do so. Dr Schirmer said that he saw no need.
The Risk Disclosure Letter
272.	The second document was a Risk Disclosure Letter signed by Mr Heininger, representing that KWL had made its own independent decision to enter into the transaction based upon its own judgment and advice from such advisers as it deemed necessary, that it was capable of assessing the merits and understanding the risks of the transaction and that it accepted those risks, and that UBS was not acting as an adviser to KWL. 
273.	It provided in addition that:
“You [KWL] further represent, warrant and acknowledge and agree to and with us on the trade date:-
(1) You are entering into the Transaction in good faith and in the course of carrying on your business.
(2) The Transaction is (i) in your best interests, (ii) consistent with your business objectives and (iii) of corporate benefit to you. 
(3) You have obtained all necessary internal and external consents and approvals to enter into the Transaction, including but not limited to the approval of your board of directors. …
(6) You have discussed the Transaction, and the accounting information that you intend to accord the Transaction, with your independent external auditors, and you will ensure that the Transaction, any related transactions and the effect of the Transaction and any related transactions (including effects on your financial condition) are accounted for, reported and represented in your accounts in accordance with generally accepted accounting principles and with appropriate disclosure …”
274.	The letter contained also an acknowledgment by KWL that UBS was entering into the transaction in reliance on these representations and warranties.
275.	It is hard to see how Mr Heininger could have believed these representations to be true. He was party to the plan to swindle KWL out of the greater part of the premium which UBS was to pay. Moreover, he and Dr Schirmer had signed the letter of 26 April 2006 whereby Value Partners was to be entitled to a fee of about US $7.875 million from the transaction.
The Letter of Authority
276.	Finally on 24 May 2006, Mr Heininger and Dr Schirmer signed a Letter of Authority confirming they were “authorised and empowered to initiate a business relationship with UBS AG and any of its affiliates for purposes from time to time to be advised”. The publicly available commercial registry confirmed that the two managing directors were authorised to conduct business and sign documents on behalf of KWL. Thus, although the letter was in a sense self-authorising (Mr Heininger and Dr Schirmer signed a letter confirming their own authority), it was supported by KWL’s entry on the commercial register.
The internal credit approval process begins
277.	Because it was a large, complex and unusual transaction, the transaction was subject to an internal UBS approvals procedure known as “TRPA” (Transactions Requiring Prior Approval). This required sign off from all of UBS’s control functions, including Credit Risk Control and various others. As part of the TRPA process, the deal team prepared a TRPA submission document summarising the transaction, together with a suitability memo. 
278.	While responsibility for coordinating the TRPA submission and suitability memo fell to Mr Lancaster, most of the drafting was done by others. A first draft of the TRPA submission was prepared by Mr Mehta and circulated to Mr Sanz-Paris, Mr Lancaster and Mr Kraus for completion and comments on 18 May 2006. It described the transaction as having been “developed jointly” between UBS and KWL’s advisers (i.e. Value Partners), a statement which was dropped from the final version of the TRPA, and identified Mr Bracy as one of those responsible for the marketing. Mr Bracy said that this was mistaken, that there was no marketing involved because the transaction was brought by Value Partners to UBS, and that his name had to be put on the document somewhere in order to ensure that his role in introducing Value Partners was recognised. I do not accept this. The draft was accurate in describing Mr Bracy as having played a marketing role. 
279.	It is of some significance in view of what was to be said later (see [323] below) that the draft submission did not suggest that the transaction had been conceived or marketed by Value Partners or that it had been brought to UBS essentially as a finished concept in the way that Mr Bracy claimed in his evidence. Indeed, he was later to have no hesitation in claiming the credit for having originated the transaction, writing in a review of his past and future activities dated 14 December 2006:
“As you know, this transaction was originated by and brought into the firm by me utilizing as advisors Value Partners who were former colleagues of mine at CSFB. We collectively worked on the original transaction for KWL.”
280.	This even goes so far as to claim that it was Mr Bracy who “utilised” Value Partners as his advisers to “bring [the transaction] into the firm” – a claim which, in my judgment, was substantially accurate.
281.	The draft TRPA recorded also that the portfolio manager chosen by KWL was UBS GAM, further confirming that this decision had been taken by this date.
282.	The suitability memo was drafted by Mr Kraus and Mr Mehta. It was produced in response to a request from Mr Linfoot of CRC pursuant to UBS’s Suitability Policy. This involved two elements: product suitability, which related to the type of client to which a given product type was relevant, and client suitability, which was concerned with whether the specific product was appropriate for the specific client. 
283.	Before the final TRPA request was submitted on 30 May 2006, there were various exchanges between Mr Linfoot and the deal team. These included an explanation by the deal team that KWL required the transaction to be executed by 7 June 2006 “due to Board unavailability after that date”. This was probably intended to refer to the Executive or Management Board consisting of Mr Heininger and Dr Schirmer, rather than to KWL’s Supervisory Board. Certainly, on 26 May 2006 Mr Sanz-Paris advised Mr Linfoot that there was Executive Board approval for the transaction.
284.	A related question then arose whether KWL needed the approval of its shareholders in order to enter into the transaction. Mr Sanz-Paris was reluctant to raise this question, expressing the view that it was sufficient that there was board approval (by which he meant Executive Board approval, although he probably did not apply his mind to the distinction between the Executive and the Supervisory Boards) and that Mr Heininger and Dr Schirmer would be signing the contracts. He also advised that UBS would be obtaining a copy of an opinion from Freshfields to the KWL board which would deal with the question of KWL’s capacity and authority and which was to be submitted to the KWL board. It is not clear on what basis Mr Sanz-Paris said this. In fact UBS never got a copy of the advice which Freshfields provided to KWL, although it did obtain a separate Freshfields opinion addressed to UBS itself, as to which see [331] to [368] below. Mr Linfoot was rightly concerned to understand what internal approvals for the transaction KWL was required to have.
The 30 May 2006 due diligence meeting
285.	One upshot of these exchanges was that a due diligence meeting was arranged for 30 May 2006, at which Mr Linfoot would seek to ensure that KWL understood properly the nature and risks of the transaction, that the transaction was suitable for KWL, and that whatever approvals were necessary had been or would be obtained. The meeting was to take place in London and to be attended by Mr Heininger. In advance of the meeting Mr Linfoot sent a list of the questions which he proposed to ask so that Mr Heininger knew what to expect. These included questions as to KWL’s rationale for entering into the transaction, its prior experience with credit derivatives, its internal approval requirements, and what advice it had received to “fully understand the risk/mitigants of CDO swaps”. Value Partners expressed surprise at the length of these questions.
286.	Although this largely undermined the point of the due diligence meeting, which was to ensure Mr Heininger’s understanding of the matters to be discussed, Mr Bracy and Mr Sanz-Paris arranged for Mr Heininger to be prepared by them for the meeting at a pre-meeting earlier on the same day. The e-mails which Mr Bracy sent at about this time were more concerned with the line which Mr Heininger should take in order to satisfy CRC than with the actual reason for the transaction. For example, Mr Bracy wrote on 29 May 2006 that:
“I told them [Value Partners] that our guys [CRC] have no idea as to the operations so they do not fully understand that KWL is entering into the transaction for risk diversification with respect to their current leases by going from a static risk to a diversified risk with the additional benefit of the portfolio manager. 
That in connection thereto they have sought the advise of counsel, financial advisors, auditors and other persons in the organization. 
That consistent with the capacity opinion that Klaus [Heininger] in his current position has the authority to enter into the transaction and has notified the necessary internal parties and will notify other necessary parties under normal procedures.”
287.	However, Mr Bracy knew that the primary purpose of the transaction for KWL was not risk diversification but the obtaining of an upfront premium. If this had not been the case, KWL would not have insisted on a premium of US $30 million at the expense of having to accept a lower credit rating. Similarly Mr Bracy had no basis to think that KWL had sought advice from the various professionals listed and (as he confirmed in evidence) had no knowledge of what approvals were necessary or had been obtained. These were simply things which he was telling Value Partners to make sure that Mr Heininger would say at the meeting.
288.	Another email from Mr Bracy, also dated 29 May 2006, stated:  
“Keep in mind the purpose is risk diversification with respect to the current lease collateral. Whereby KWL is going from a single name exposure to a pool of assets managed by a professional manager. Given the downgrade of AIG and the German bank situation, they felt it was prudent to investigate lease restructurings, especially given that others in the marketplace are examining it as well.
All necessary approvals are in place, the accountants, lawyers, advisors (financial as well as internal) have been notified and consulted. We understand that there is a very limited risk that after a certain level of defaults we are subject to loss of principal and possibly the investment. We do feel however, that this risk is mitigated by the manager and the diversified portfolio. When compared with the existing risk with the current situation (single name exposure for the duration of the lease term) we think this is an acceptable risk.”
289.	This was in effect a script for Mr Heininger which Mr Bracy hoped would satisfy CRC. He knew that it was likely to be important to CRC that the purpose of the transaction was to reduce KWL’s risk, that all necessary approvals (whatever they might be) were in place, and that KWL had been advised by appropriate professionals. Mr Bracy therefore set out the approach which Mr Heininger should adopt at the meeting, whether or not these things were actually true. It was also important, and was emphasised as part of the line which Mr Heininger was to take, that KWL understood that there was some risk, however limited, that it could lose its entire investment.
290.	The fact that Mr Bracy was telling Value Partners in this way how best to brief Mr Heininger shows again that their joint objective was to persuade CRC to approve the transaction, if necessary by providing this deceitful account of the purpose of the transaction. There was no question of Value Partners providing any independent advice to KWL. The pre-meeting duly took place on 30 May 2006, attended by Mr Bracy and Mr Sanz-Paris, by Mr Senf and Mr Blatz, and by Mr Heininger. Although there is no record of it, the probability is that the approaches which Mr Bracy had set out in his e-mails quoted above were reinforced.
291.	This was followed by the meeting with Mr Linfoot of CRC. One of Mr Linfoot’s questions had been about the approvals for the transaction which KWL would need to obtain. The minutes of the meeting record that Mr Heininger stuck to the script with which Mr Bracy had provided him:
“Have executed one CDS last year (with Balaba in relation to a ‘tax driven UK lease’), first and only credit derivative transaction. This will be first CDO. Understand that CDS will help diversify credit risks and CDO is a diversified portfolio which will increase yields. Financial activities outside of water utility tariff agreements, provides opportunity for KWL to make additional returns.
No further approvals are required, CEO/CFO can go ahead if he wishes. CEO believes that under the approvals obtained for X-Border Leases some years ago the CEO has sufficient authority to transact credit derivatives, no further authority from Supervisory Board is required. They have an opinion from Freshfields which reiterates this.”
292.	There was also a question asking what contact regarding the transaction there had been with KWL’s auditors. At this point it appears that Mr Heininger departed from Mr Bracy’s script, saying that the transaction had not been formally reviewed with the auditors (KPMG), but that no issues were expected.
293.	I would make these observations about this meeting:
a.	The principal rationale for the transaction was presented as being to diversify risks, although the desire for additional returns was also stated. This was a distortion of KWL’s true priorities, as Mr Bracy knew.
b.	It was made clear to UBS that KWL did not intend to obtain the approval of its Supervisory Board for the transaction. 
c.	Mr Heininger gave Mr Linfoot a clear assurance that KWL’s Supervisory Board approval was not required. 
d.	He also said that KWL had already obtained advice from Freshfields to that effect. This was not in fact true (see [333] below). Freshfields had given much more equivocal advice.
e.	In these circumstances it is to be expected that Mr Linfoot would have asked for a copy of that opinion, not least as this had already been promised (see [284] above). However, neither Mr Linfoot nor for that matter anybody else did so.
f.	As it happens, a document in German was subsequently provided to UBS as an attachment to an email, which was described in the email as a draft of Freshfields’ opinion to the KWL board. The same attachment was also attached to versions of the UBS TRPA document, where again it was described as a Freshfields opinion to KWL. In fact, however, it was no such thing, but UBS either never opened the attachment or did not have it translated into English, and therefore never discovered this. Despite some uncertainty by Mr Lancaster and Mr Linfoot in the course of their cross examination, in which they were persuaded to accept that it was likely that they did receive it, I find that UBS never saw the opinion provided by Freshfields to KWL.
g.	Previously UBS had been given to understand that KWL’s auditors had been consulted about the transaction. Indeed, KWL was under an obligation (in the Risk Disclosure letter) to consult them. Now UBS was being told that this had not happened. However, this discrepancy was not explored and probably was not noticed.
294.	The somewhat contemptuous attitude of the deal team to CRC can be seen from an email exchange which took place at this time. One query raised by Mr Linfoot was why KWL was keen to buy protection on the CDSs from UBS when UBS was actually rated lower than the single names for which KWL was buying protection. Mr Mehta commented, “they picked up on it … heheh”. It is apparent that the deal team viewed CRC as a nuisance which probably did not fully understand the transaction and which stood in the way of profitable business, with which it was not necessary to be completely truthful. That attitude became even more apparent after CRC refused to approve the transaction and the deal team escalated the position to senior management (see [300] below). At that time, in exchanges among members of the deal team, Mr Bracy referred to “killing the credit monster” and, while Mr Sanz-Paris did not go so far as to describe Ms Short as a witch, he did refer to escalation as “the silver bullet”. It is apparent, as Ms Short acknowledged, that the deal team viewed CRC as the enemy. Such an attitude ran obvious risks of storing up future trouble.
295.	Mr Lancaster submitted the completed TRPA request on 30 May 2006. It set out the structure of the transaction (which at that point was expected to include STCDOs to replace all four single name bonds) and emphasised their purpose as a restructuring of these single-name exposures. It explained that KWL was being advised by Value Partners and Freshfields, and confirmed that UBS had explained to KWL (as in fact it had) that it had a “risk of principal loss in adverse credit scenarios”. 
296.	On the following day, 31 May 2006, Mr Lancaster submitted the final version of the suitability memo. The memo suggested that KWL “could be regarded as a sophisticated and experienced investor” in the light of various matters including its participation in the cross-border leases, and confirmed that KWL was advised by Value Partners and Freshfields, who were to provide an opinion confirming that KWL had capacity and authority to enter into the transaction. It stated also that KWL’s major shareholder, LVV, was aware of the transaction, as a result of the fact that Dr Schirmer was a managing director of LVV as well as of KWL. The memo made clear that KWL intended to notify its Supervisory Board of the transaction at the board’s next regular meeting in September, and therefore reiterated that the Supervisory Board would not be asked to give its prior approval to the transaction. Under the heading of “Course of Dealings Considerations”, it was recorded that:
“KWL through its advisors Value Partners has approached UBS and we believe other financial institutions. The product has thus not been actively recommended to KWL through UBS-IB or another UBS Business Group. Value Partners on behalf of KWL specifically asked for UBS capabilities on lease defeasance restructurings into managed CDOs.”
297.	For the reasons already explained, this was a rather misleading statement.
CRC declines the transaction
298.	Despite Mr Bracy’s and Mr Sanz-Paris’s best efforts to prepare Mr Heininger for his meeting with Mr Linfoot and to make the best case they could for approval of the transaction, Ms Short of CRC refused to approve it. Her reasons were set out in an e-mail which she sent on the following day:
“Our issues are relatively simple. This is a small utility and the potential credit exposure is too large for the capacity of the company. Moreover, if the transaction goes wrong the reputation risk to UBS could be significant given KWL’s relatively unsophisticated profile, the fact that we are also the asset manager and that we have made 20 odd million dollars out of the deal.”
299.	Thus, as Ms Short saw it, if KWL was ever called upon to pay hundreds of millions of dollars, it was doubtful whether it would be able to do so, while enforcement action by UBS would receive wide publicity, at least in the German press, and UBS could expect to be portrayed as having taken advantage of a less sophisticated counterparty, with questions being asked as to how and why it had persuaded KWL to enter into such an unusual and risky transaction and what profit UBS had been making from the deal. 
Escalation of the approval decision
300.	The CRC decision came as something of a shock to the deal team, but the team members did not give up. Instead they escalated the decision by approaching more senior UBS management and, in the end, going to the very top of the investment bank in a week of somewhat frenzied lobbying. In doing so they emphasised the profitability of this particular transaction and the future business which was expected to come to UBS through Mr Bracy’s connection with Value Partners. 
301.	Estimates of the value of this future business varied. Mr Bracy described it in an email to his immediate boss as “a $50-60 million a year business opportunity for the firm”. Other figures mentioned to senior management were “a total revenue opportunity of $40 to 70m” from transactions with clients of Value Partners which were anticipated later in the year and “50-60m of additional business via the adviser which will not be with us if we fail to deliver”. That last reference to US $50 to $60 million was in addition to the US $20 million which UBS expected to make from the KWL transaction.
302.	Of course, the fact that the deal would be profitable and that there would be a mouth watering stream of future business opportunities which would be lost if this transaction were vetoed did not meet the concerns identified by Ms Short as to the KWL credit risk, the suitability of the transaction and the reputational risk to UBS. Instead, and in essence, profitability was presented as a reason to go ahead regardless of those concerns, taking (as it were) whatever damage to UBS’s reputation might arise in the future on the chin in favour of booking a large immediate profit with the expectation of more to come. 
303.	One of those whose support as an advocate for the deal was enlisted by the team was Mr Duncan Rodgers of UBS’s Derivatives Credit Exposure Management Desk, a senior and respected figure within UBS. He accepted in evidence that his advocacy was based upon the facts that (as his emails to senior management urged) the deal was very profitable compared to other business which UBS might do and that UBS would lose out on other similar deals if this one did not proceed. Mr Rodgers said in evidence that all he meant was that UBS would lose the opportunity to bid for other deals in competition with others, but I do not accept this. It is obvious that he envisaged a flow of business directed from Value Partners to UBS. Mr Rodgers also argued in his emails to senior management that the risk to KWL of being required to pay out was very low and that this was “not a bad trade for KWL”. I accept that this was his view. There was, however, as he acknowledged, a significant element of advocacy in the arguments which he put forward and it seems to me, having heard extensive evidence as to the risks of the transaction to KWL, that Mr Rodgers’ arguments were flawed as well as being unduly coloured by his view that the transaction was (in his words) “overwhelmingly shareholder positive”. CRC, and in particular Mr Bawden and Ms Short, took a more cautious and realistic view that although the risks might be low, they were nevertheless real.
304.	Mr Bracy was evidently annoyed and to some extent embarrassed by CRC’s refusal to approve the deal, not least as he was the one who had to deal with Value Partners. However, in his words, he put the best “spin” on the situation which he could, saying to Mr Senf and Mr Blatz that there was a benefit in terms of increased visibility to the senior management of UBS for future business. Mr Bracy turned out to be right about that, as shown by the messages of congratulation sent to him when the deal eventually closed (see [371] below). 
305.	Mr Senf and Mr Blatz told Mr Bracy that they would need to give some explanation to Mr Heininger about what was happening, but they also made clear that they did not want to give him a full explanation (“they do not want to explain the current situation”) and that “on a personal level, they have a lot at stake too”. This was a further respect in which it was apparent to Mr Bracy, and also to Mr Sanz-Paris with whom Mr Bracy shared this information, that KWL’s supposedly independent advisers were keeping some matters back even from Mr Heininger and had their own interests very much at heart.
306.	The first stage in the escalation process was for Mr Czekalowski to ask his superior, Mr Chris Ryan, to intercede with Ms Short. Mr Ryan was based in the United States and, although not a witness, appears to have been a very senior and influential man within UBS with a formidable reputation. Mr Blatz later described him, in somewhat excited terms which presumably originated from Mr Bracy, as “the boss of the bosses boss boss”. However, neither Ms Short nor her then manager (Mr Bawden, then UBS’s Chief Credit Officer for Europe, who supported her decision to reject the deal) was prepared to change their view.
307.	A “senior forum” was then convened to discuss the transaction, attended by (among others) Mr Bunce (UBS’s Global Head of Fixed Income), Mr Ryan, Ms Short, Mr Bracy, Mr Sanz-Paris and other members of the deal team. This took place on the evening of 2 June 2006. The outcome of the meeting was that it was confirmed that UBS’s compliance and legal control functions approved the transaction, but CRC and another function, Market Risk Control, were not prepared to do so on the grounds of the credit and reputational risks to UBS. It was suggested that one way in which the credit risk concern could be dealt with was for UBS to deal directly with KWL for only part of the overall transaction, with the balance to be “intermediated” by another bank. This would limit the KWL credit risk to which UBS would be exposed, leaving the other bank to take the balance of this risk. Mr Bunce and Mr Ryan were very supportive of the transaction, but no final decision about it was reached.
308.	Mr Bracy reported to Mr Senf and Mr Blatz the possibility that “intermediation” might be a condition of UBS approval. Their response was that this would be acceptable provided that KWL’s premium targets were met, but that if they were not, they would take the transaction elsewhere. In a further conversation on the following day, Mr Senf advised that this meant that KWL would require a minimum return of US $20 million on the first leg of the transaction, and that Mr Heininger understood the position, although Dr Schirmer’s understanding was “not so much”. By this stage, therefore, the setback must have been explained to Mr Heininger.
309.	By 6 June 2006 the KWL deadline was fast approaching and a decision had still not been made. On that day Mr Linfoot authored a credit request which set out, as he saw it, the positive and negative features of the deal. The negatives included, revealingly and in my judgment accurately, that the:
“CDO Swap is not linked to lease defeasance. The rationale of the CDO is to speculate on credit derivatives for yield pick-up.”
310.	In other words, it was the CDS and not the STCDO which would provide protection against the default of the single name corporate bonds, while the STCDO was an essentially speculative transaction designed to produce an upfront premium. This sentence was removed from the later and final version of the credit request, probably because UBS realised that this was not the best way to justify the transaction which by then had been approved.
311.	Despite the absence of approval for the deal, Value Partners and Mr Bracy remained hopeful and travelled to London on 6 June 2006 in anticipation of closing the deal the next day. Mr Heininger and Dr Schirmer travelled on 7 June 2006. Mr Bracy’s view of the escalation process can be seen in an e-mail which he sent in the course of his journey from the United States:
“… I am on my way to London to close a very profitable restructuring. So much so that Simon [Bunce] and Chris Ryan have got involved to ‘force’ internal credit to reverse their internal ruling and approve the deal.”
312.	This was not quite right. Mr Bawden and Ms Short stood their ground, despite the pressure they came under. They never approved the deal. But their refusal to do so was overruled. In substance, therefore, Mr Bracy was right that the deal was forced through. However, the approval only came at the last minute.
313.	The proposed closing day, 7 June 2006, appears to have been a day of some embarrassment at the UBS office, as Mr Heininger and Dr Schirmer were kept waiting, without being told (certainly in the case of Dr Schirmer) the reason for the delay. On Mr Czekalowski’s instructions, Mr Lancaster prepared a letter (which in the event did not need to be sent) regretting that the transaction could not be executed “due to current market conditions”. Of course, that was not the real reason.
314.	One odd episode during this day of waiting concerned Tilo Kraus, the only German speaker on the deal team. Mr Bracy sent an email to Mr Kraus, instructing him:
“Tilo, remember not to discuss dollars with the client. He is not to know”
315.	The “client” (singular “he”) must here refer to Dr Schirmer, who spoke little or no English. Mr Heininger did speak good English and had been much more involved in the transaction. It is apparent that Mr Bracy wished Dr Schirmer to be kept in the dark about some aspect of the transaction’s figures. Mr Kraus claimed not to remember this email, but ventured the suggestion that it referred to the fact that the final figures would not be known until the trades to make up the portfolio were executed after the closing, so that figures should not be mentioned which might later turn out to be wrong. I do not accept this. Mr Bracy said that this request came from Value Partners. It was similar to the instruction given much earlier not to talk about “absolute numbers” (see [225] above). It must have been obvious to Mr Bracy – and to Mr Kraus – that far from providing independent advice to KWL, Value Partners was keen to ensure so far as possible that one of the two managing directors of KWL who were to sign the contracts did not have a full understanding of the transaction (as in fact he did not). UBS assisted Value Partners to achieve this objective by passing on and complying with this instruction. It is true that Dr Schirmer could easily have found out about the premium, for example if he had taken more care to examine the documents which he signed, albeit that they were in a language which he did not understand, and that UBS and Value Partners must have realised this, but that does not detract from the intention that, if possible, he was to be kept in the dark.
Approval of the transaction
316.	Eventually, at a short meeting (in fact, during a 20 minute break in a board meeting) in New York on 7 June 2006 attended by Mr Jenkins (the CEO of the investment bank), Mr Bunce, Mr Ryan, Mr Bawden, Ms Short and others, a decision was reached to approve the transaction. Mr Jenkins personally made the decision to accept the reputational risk. The deal was seen as just too profitable to turn away despite the risk involved. Ms Short, who was present, had no hesitation in accepting this:
“Q (by Mr Lord). Isn't the truth that what happened was that the profitability of this deal was such that Mr Jenkins was prepared to take upon his own shoulders the reputational risk to UBS?
A. That's correct, yes.”
The approval conditions
317.	However, in an attempt to mitigate the risks of the transaction to UBS, four conditions were imposed. These were as follows:
“1. UBS can only execute approximately half of the transaction directly with KWL (ie the portion related to the Balaba hedge only). The rest must be executed with a third party facing KWL, with UBS providing the CDS protection and hedging the third party on the CDO element. 
2. 	Senior management from IBD Germany to support in writing the transaction and the importance of the relationship with KWL.
3. KWL must agree (to be evidenced to UBS) to inform the advisory board of the transaction with UBS. Language must be acceptable to UBS. 
4. UBS to file Value Partners marketing material.”
318.	As already explained, the first of these conditions addressed the KWL credit risk. It was thought to be preferable that the intermediary bank should be German, a point which went to the issue of reputational risk. If UBS ever had to enforce payment, it would at least be doing so together with a German bank.
319.	As to the second condition, if the transaction was to close as intended on the same day, there was little or no time for anyone in Germany to become sufficiently familiar with it or with KWL to give an informed approval, and it was never explained by reference to what criteria any such approval should be given. In fact, although he had been forewarned and no doubt briefed earlier to some extent by telephone, Mr Prelle of UBS in Germany confirmed his support for the deal within only 35 minutes of being requested to do so. His approval was, therefore, an essentially meaningless formality. It would be surprising if the UBS senior management who imposed this condition ever expected it to be anything else.
320.	The third condition, that the KWL Supervisory Board should be informed of the transaction, was intended to ensure that the board could not claim later not to have known about it. However, it begged the question what would happen if, when told about it, the board disapproved of the transaction. It is no answer to say, as Mr Czekalowski did in his evidence, that the transaction could if necessary be unwound, albeit at a cost. First, depending on market movements in the meanwhile (as UBS knew, the Supervisory Board was not due to meet until September 2006), the cost might be prohibitive. Second, if the transaction was within the managing directors’ authority so that KWL was legally bound, why should UBS agree to unwind it, giving up a substantial profit to which (on this hypothesis) it was fully entitled as well as the management fees which UBS GAM could expect to earn? Assuming that the board did not object, the requirement of subsequent notification would have provided UBS with some protection against the reputational risk, but nothing more than that. 
321.	Pursuant to this third condition, on 8 June 2006 Mr Sanz-Paris sent a presentation, headed "Collateralised Debt Obligations - Presentation to KWL", to Mr Heininger for him to present at KWL's next Supervisory Board meeting. This spelled out that assuming a recovery rate of 40%, there would need to be 5.8 defaults in the portfolio before KWL would begin to suffer losses on its tranche (i.e. losses would begin to occur upon the 6th default) and that after 8.3 defaults (i.e. upon the 9th default), KWL would have suffered the full loss of its notional and would be obliged to pay UBS £153 million. It is notable that although the presentation referred to KWL’s investment in the STCDO as being “to diversify the risk concentration and achieve an enhanced yield”, and although it had from the outset been made clear to UBS that at least one important objective of KWL was to achieve a substantial upfront cash premium, there was no mention in the presentation of the fact that the enhanced yield was to take the form of upfront cash, let alone of the amount of the premium. Consistently with Value Partners’ instruction to Mr Bracy which he in turn passed on to Mr Kraus (see [314] above), even the KWL Supervisory Board was not to be told about one of the most important features of the transaction.
322.	Mr Heininger responded on the same day, confirming that he would use "substantially the same slides" as Mr Sanz-Paris had sent, translated into German. As will be seen, however, he found that an easy promise to break.
323.	The fourth condition, that UBS should keep on file Value Partners’ marketing material to KWL, was intended, as Mr Bunce agreed in cross examination, to provide evidence on UBS’s files that Value Partners had the necessary expertise and had marketed the transaction properly to KWL. This posed a problem because, as the deal team knew, there was no such marketing material. Mr Czekalowski discussed this with Value Partners and then proposed to Mr Ryan that in order to fulfil this condition a letter should be obtained from Value Partners stating that it had “conceived and marketed the structure to KWL”, that it “had a mandate from KWL prior to approaching UBS for execution” and that it had “explained to named senior management of KWL the risks of and the structure of the Transaction and that KWL understood and has accepted the structure and any and all associated risks”.
324.	The first two of these statements were not correct and, although he would not accept it, Mr Czekalowski knew this. Value Partners had not conceived or marketed the transaction and did not simply approach UBS to execute an already developed transaction for which it already had a mandate from KWL. The transaction had been conceived in its general outline by Mr Bracy (who was credited with responsibility for marketing in UBS’s own TRPA documents: see [278] above) in his initial discussions with Value Partners. This outline had then been proposed to Mr Heininger who had responded enthusiastically to the idea of a transaction which could generate US $30 million in cash. It had then been marketed to KWL by UBS, for example at the 9 May 2006 meeting, and in the course of this marketing, the transaction had been developed to meet KWL’s requirements (for example, to accept a lower A, instead of AA, rating in order to maintain a total premium of the order of US $30 million).
325.	In reality the proposal for a letter, although described as being to “fulfil” the fourth condition set by UBS’s senior management, was not a way of fulfilling the condition but a way of getting round the fact that this condition could not be fulfilled. As Mr Lancaster was later to put it:
“There wasn't any marketing materials from VP. We explained that at the time, hence reason for obtaining the letter from them.”
326.	By late on 7 June 2006, however, the deal team was not going to allow such a quibble to stand in the way of the transaction. Mr Ryan approved the proposal for a letter from Value Partners. The required letter, drafted by UBS’s legal department, was duly signed by Value Partners the following day.
Closing of the Balaba transaction
327.	The senior management decision was communicated to Mr Czekalowski late in the afternoon (UK time) on 7 June 2006. At this point Mr Heininger and Dr Schirmer had arrived and had been waiting at UBS’s offices for several hours in anticipation of signing the transaction documents. Once the approval came through and the problem of the fourth condition had been overcome, the documents were signed.
328.	Mr Bawden and Ms Short were not happy with the decision taken by Mr Jenkins and Mr Bunce, but they took the pragmatic view that there was little that they could do about it, and that it was not sensible to escalate the decision even higher in UBS beyond the investment bank. Mr Bawden did, however, spell out that as the decision had been made by others he was not required to opine on the issue whether the transaction was suitable for KWL and did not support it. He was careful also to record what had happened in the final version of UBS’s credit request:
“Given my concerns about the appropriateness of this transaction, considering the potential impact of an extreme stress event on the financial standing of client, the client suitability determination and diversification benefit rationale were referred to and approved by Global Head of FI (Bunce) and IB CEO (Jenkins).”
329.	As Ms Short rightly observed to Mr Bawden three years later, by which time it was apparent that the transaction had been disastrous:
“I don't think we could have done any more at the time; you even mentioned 'an extreme stress event' as being the reason for your concern on the appropriateness. You should rest easy on this one.” 
330.	Although some UBS witnesses sought to paint a picture that it was normal for decisions to be escalated from CRC to senior management, it was in fact unprecedented for such a large transaction to be pushed through by senior management in the way which happened here. Mr Bawden was asked repeatedly in cross examination whether in his 23 years at UBS there was any other transaction with a value of over US $100 million where there had been a decision to proceed even though he had not been persuaded of the transaction’s suitability and went so far as recording that he had not approved such suitability. Although he was obviously uncomfortable with the question, he was unable to identify any other occasion when this had happened. Nor did anyone else.
The Freshfields capacity opinion
331.	At this point it is necessary to return to an earlier point in the story and describe what happened regarding the provision by Freshfields of a legal opinion as to (among other things) the capacity of KWL to enter into the transaction.
332.	UBS first requested that a formal opinion be provided by Freshfields, the German lawyers advising KWL, to confirm that KWL had capacity to enter into the transaction, on 27 May 2006. The background to this request was that it was well known that questions could arise regarding the capacity of municipal or municipal-owned bodies to enter into derivative contracts, and it was recognised that if such transactions went wrong and the municipal entity was called upon to pay, it might well defend a claim on the ground of lack of capacity to enter into such contracts or lack of authority on the part of the individuals who signed the relevant contracts. It was therefore vitally important to ensure that a municipal counterparty had capacity, that the individuals who were to sign had authority to do so, and that all necessary formalities for the validity of the transaction had been properly complied with.
333.	As it happens, Freshfields’ Frankfurt office had provided a draft legal opinion to KWL only the previous day, 26 May 2006, although this was stated to be not yet in a form on which KWL could rely. However, the final signed version was not materially different. The draft stated very clearly (as it were) that the position regarding the need for Supervisory Board approval was not clear:
“Since this transaction concerns a project that -- to our knowledge -- is being carried out for the first time in the Federal Republic of Germany, we point out that no case law or literature is available concerning the questions that are addressed in this opinion. It cannot therefore be ruled out with certainty that a court or a supervisory authority might adopt a position with respect to individual questions that differs from our results.
It is open to question whether in this respect a resolution of KWL's Supervisory Board would be required in the relationship between the Managing Directors and the company.”
334.	The draft went on to express doubt whether KWL’s Articles did require the approval of the Supervisory Board to the transaction, suggesting reasons why (on the assumption that the effect of the transaction was to reduce KWL’s overall risk, which appears to be what Freshfields had been told) that might not be necessary. It reached a firmer conclusion dealing with the issue of shareholder approval, suggesting that this was not required.
335.	I asked Dr Schirmer what he would have done if Freshfields’ advice had been that (1) it was an open question whether Supervisory Board approval was necessary in order for this transaction to be legally binding, (2) the KWL Articles were rather vague on the point, (3) there were arguments to the effect that prior approval was unnecessary, (4) there were no decisions of the German courts on the point, and (5) on balance, Freshfields’ view was that if the assumptions on which the opinion was based were confirmed by KWL’s economic advisers, it was unnecessary to get prior approval from the Supervisory Board, but although that was their best opinion, they could not be certain or give KWL any guarantees. I regard that as a fair summary of the advice which Freshfields in fact gave which, if anything, puts the case that prior approval was unnecessary slightly higher than Freshfields actually did. After confirming that he understood the question, Dr Schirmer replied:
“Well, the individual arguments or aspects are of different nature and contradict one another partially, or stand contrary to one another, then in my office as a managing director, I have to balance out between the risk that a contractual conclusion may not be legally binding without the approval of the Supervisory Board, and the consideration of the Supervisory Board. Then no adviser or lawyer will help me, I have to take an entrepreneurial decision. And I personally, under these circumstances, would have thought about it a little bit longer, and if I decided on my own, then under these circumstances, I would have asked the Supervisory Board to consider it.”
336.	It is obvious that any conscientious managing director of KWL, faced with such advice, would not have concluded this transaction without first obtaining the approval of KWL’s Supervisory Board. However, this did not happen. Dr Schirmer confirmed also that there would have been no difficulty in arranging for the Supervisory Board to consider this question despite the imminence of the World Cup (as he put it, seeming slightly offended, “KWL neither stopped water supply during the World Cup and the Supervisory Board would also have met during the World Cup if it had been called”). He confirmed also that if, for whatever reason, there needed to be a delay before the Supervisory Board could meet, there was no imperative reason from KWL's point of view why this transaction had to be concluded before 8 June 2006.
337.	However, as already explained, neither Freshfields’ draft advice to KWL nor any later version of it was provided to UBS. Instead, a first draft of a Freshfields opinion addressed to UBS was provided on 29 May 2006, which was to be signed, once finalised, by a partner in the firm. Mr Sanz-Paris passed this to Mr Lancaster to review. 
338.	The draft identified the documents which Freshfields had examined and stated a series of assumptions on which their opinion would be based. One of these, assumption (k), caused some debate. It was as follows:
“(k) that the Transaction has been entered into by KWL to reduce its risk exposure from existing financial investments”.
339.	This appears to be an assumption about the purpose of (or motivation for) the transaction rather than its effect, although no doubt it was implicit that the economic effect of the transaction would be as intended. On the basis of this and other assumptions, the draft confirmed that:
“Corporate Power 
(b) KWL has the requisite corporate capacity to enter into the transaction contemplated in the Operative Documents. The execution and delivery of the Operative Documents by KWL, and the performance of its obligations thereunder, do not violate any applicable corporate laws or the Articles of Association of KWL. 
Due Authorization, Execution and Delivery 
(c) Each of the Operative Documents has been duly executed on behalf of KWL. While we have not verified whether the transactions contemplated in the Operative Documents have been authorized in accordance with the Articles of Association and with any standing orders or other internal guidelines of KWL, a violation of such requirements would not affect the valid execution and delivery of the Operative Documents, except in cases of fraudulent collusion.”
340.	Although UBS was not to know this, the statement in paragraph (c) that Freshfields had not verified whether the transactions had been authorised in accordance with KWL’s articles or internal guidelines seems rather surprising. That appears to be precisely what Freshfields had wrestled with in the draft opinion prepared for KWL the previous day which had concluded that the issue was “open to question”. Moreover, whatever precisely it was that Freshfields were saying in paragraph (c) that they had not verified (“whether the transactions … have been authorized in accordance with the Articles of Association”), they were making a positive statement in paragraph (b) that “the execution and delivery of the Operative Documents by KWL, and the performance of its obligations thereunder, do not violate … the Articles of Association of KWL”. 
341.	On reviewing the Freshfields draft, Mr Lancaster responded by questioning the need for (among other things) assumption (k), adding that this was “the stated aim” of the transaction (although when asked in cross examination who had stated this to be the aim, he was unable to say). Freshfields’ explanation was that the assumptions set out in its draft were “factual matters which are, or could be, relevant to the correctness of the opinion statements”. They went on to explain that assumption (k) was intended to address “a recent tendency of German courts to scrutinise transactions entered into by municipal businesses more closely”, and that in their view “the use of the swap as an instrument of risk mitigation is the best indication that the transaction will not be caught up in the present development”.
342.	It was, therefore, apparent to UBS at this stage that the issue whether KWL’s motivation in entering into the transaction was to reduce its overall risk was potentially critical to the validity of the transaction under German law. However, UBS (although not necessarily Mr Lancaster) also knew (1) that KWL’s real motivation was, as it had been from the outset, to maximise the upfront premium which it could obtain and (2) that if the premium was to be of the order of US $30 million as KWL insisted, the effect of the transaction would not be to reduce KWL’s overall risk. 
343.	Mr Lancaster said, and I accept, that he wanted this and other assumptions to be removed in order to obtain a “clean” (i.e. unqualified) opinion regardless of whether the facts assumed were true or false because an assumption would create doubts, but he also said that he understood that it was or might be an important consideration for determining the validity of the transaction that it reduced KWL's risk. On 2 June 2006 he told Freshfields that assumption (k) was “something that our internal control functions are very uncomfortable with”, that it “raises doubts as to capacity” and that it needed to be removed from the opinion in order for UBS to proceed. It is not clear, and neither Mr Lancaster nor Ms Short knew, what these “internal control functions” were. It may be that Mr Lancaster used this expression as a way of referring to his own concerns. 
344.	Mr Lancaster’s exchange with Freshfields was copied to Mr Bracy and Value Partners, who were unhappy about this potential obstacle to the consummation of the deal. Mr Bracy complained to Mr Lancaster that Mr Senf “questions why our internal control functions question the motivation why KWL enters into the transaction. Frankly, as a lawyer [I interpose that Mr Bracy was qualified as a lawyer in the United States and had previously worked in a well known US law firm], I’m not clear if they have ‘standing’ to question motivation.” This was an extraordinary intervention, to which Mr Lancaster responded that the “key issue” was that this question “impacts that the client can actually do this trade”. Clearly Mr Lancaster understood the potential importance of the point.
345.	Following this, and still on 2 June 2006, there was then a telephone conversation between Mr Bracy and Mr Lancaster after which Mr Bracy told Mr Lancaster (copying Mr Sanz-Paris also) that he had spoken to Mr Senf and told him that “we would prefer not to see the reasoning for the trade” and suggested that the question of KWL’s capacity to enter into the transaction should be no concern of Mr Heininger:
“frankly Klaus should not care, either he has capacity or not (Berthold agreed)”. 
346.	Mr Bracy suggested also that: 
“If Freshfields has an issue due to hammersmith, then they can do it in a side letter to kwl and leave us out of it.”
347.	This was a reference to the well known case of Hazell v Hammersmith & Fulham LBC [1992] 2 AC 1 in which the House of Lords held that an interest swap agreement to which an English local authority was a party was ultra vires the local authority and so void ab initio. Once again this was an extraordinary suggestion by Mr Bracy, in effect that Freshfields should provide an unqualified opinion to UBS confirming that KWL had capacity while qualifying this in a side letter addressed to KWL alone. Equally extraordinary was the idea that Mr Heininger should not care whether he had capacity or authority to sign. Obviously he should have cared and the idea that Mr Bracy, let alone Value Partners who was supposed to be acting as KWL’s adviser, could think otherwise should have rung loud alarm bells. The email demonstrates Mr Bracy’s and Value Partners’ determination to drive the transaction through at all costs. Their objective, quite clearly, was not to ascertain whether KWL did in fact have capacity, but to get a letter from Freshfields which would enable the deal to go ahead.
348.	Freshfields’ response to Mr Lancaster’s request for the removal of assumption (k), given by Dr Daniel Reichert-Facilides, was that if UBS was uncomfortable with the assumption as it stood, they were prepared to consider replacing it with a qualification explaining the recent German case law in more detail. Mr Lancaster’s initial reaction was that this would not help – the assumption was causing doubts as to KWL’s capacity to do the trade and needed to be removed. He asked Freshfields to reconsider the position with KWL. 
349.	At the same time Mr Senf forwarded the exchanges with Freshfields to Mr Heininger, copying his email to UBS and Freshfields, leaving no doubt as to his irritation at the hold up and requesting Mr Heininger to give instructions to break the apparent logjam:
“The reduction of risk is just one of many reasons for KWL to enter into the transaction. Beside the fact that the capacity opinion is not linked to the reasoning, there are other reasons for sure. Now it is really time to shift this to a more professional level! 
Klaus please instruct!”
350.	This shows (and again showed to UBS) that Mr Senf’s priority was not to investigate whether KWL did in fact have capacity to enter into the transaction, but to push Freshfields to produce an opinion which would enable the transaction to go ahead. His request to shift to a “more professional level” was really a request to adopt a less professional approach.
351.	However, it was Mr Lancaster who was dealing with this issue on behalf of UBS. It is apparent that up to this stage, and because of assumption (k), he had some doubts about whether KWL had capacity to enter into the transaction. Ultimately, however, he took the view, in my judgment reasonably, that it was for Freshfields to decide whether KWL’s motivation in entering into the transaction was relevant to any issue of capacity or authority under German law. If they insisted on retaining assumption (k), he had made his position clear that the deal could not proceed. If they were prepared to remove it, that must be because they had satisfied themselves that it was not necessary. He was entitled to assume that Freshfields were well able to make their own decision about this and would not be swayed by any pressure being applied by Value Partners or the absurd suggestions of Mr Bracy.
352.	It is not known what if any instructions Mr Heininger gave to Freshfields following Mr Senf’s e-mail above. The result, however, was a revised version of the draft capacity opinion, emailed to Mr Lancaster later on 2 June 2006.
353.	This deleted assumption (k) to which UBS had objected, retained unchanged paragraphs (b) and (c) dealing with “Corporate Power” and “Due Authorization, Execution and Delivery”, and added a new paragraph (e) under the heading of “Observations”:
“It should be noted that a German appeals court, while confirming the capacity of German municipal companies to enter into swap transactions, has recently held a bank liable on the grounds that it did not properly analyze and advise on the specific risk management needs of its local utility customer before recommending and entering into a currency swap (OLG Naumberg …)”
354.	The decision of the Naumberg court, as described by Freshfields, was therefore that a bank could be held liable for mis-selling or failure properly to advise in relation to a derivatives transaction, rather than that a municipal company lacked capacity validly to conclude such a transaction. This was in accordance with what Freshfields had told KWL in the draft opinion of 26 May 2006, namely that the Naumberg case “merely establishes the liability of an advising financial institution” and “does not come to the conclusion that derivative transactions in principle are not to be entered into by local authorities or by municipal companies”.
355.	The result of this change in the draft capacity opinion to be provided to UBS was that the opinions expressed were no longer stated to depend on KWL’s intention in entering into the transaction or its effect, albeit that a warning was sounded about liability for failing to advise. 
356.	UBS accepted these changes to the opinion. There was, however, one final twist, when on 7 June 2006 Allen & Overy’s Frankfurt office (advising UBS) contacted Freshfields asking them (as Dr Reichert-Facilides put it in an internal email to his partners) “to broaden our legal opinion to include the topic of enforceability.” What prompted this is not known, but it appears that Allen & Overy were not fully satisfied with the draft as it stood.
357.	Dr Reichert-Facilides added that provided this was limited to the choice of law, governmental consents and enforceability of judgments, he had no fundamental reservations about Allen & Overy’s request. His partner, Dr Pegatzky, was less sure, pointing out that the initial draft had been written before the contractual documentation was available and on the basis of instructions (presumably from Mr Heininger) that the transaction “notably reduced the risk to KWL”, and that (understandably) it was not for Freshfields to assess whether this was correct.
358.	However, any such reservations were not communicated to UBS. On 7 June 2006 Freshfields issued a further (and in the event final) draft of its opinion letter to UBS. This was in materially the same form as the previous version of 2 June 2006, with the addition of a paragraph stating that the obligations of KWL “will be enforceable in Germany in accordance with the above, subject to the assumptions, limitations, qualifications and observations of this opinion”. One such qualification, newly added, was that:
“(d) the term ‘enforceable’ as used in this opinion does not mean that an obligation will be enforced under all circumstances, but that the obligation is of the nature that is generally enforceable in German courts.”
359.	Thus Freshfields would not say without qualification that the STCDO with KWL would be enforceable (which may or may not be what they had been asked to say), only that it was the kind of obligation that was generally enforceable in the German courts. However, it is not surprising that Freshfields would not give an unqualified statement that the STCDO would be enforceable come what may. There was always the possibility that there might be some vitiating factor of which Freshfields were not and could not be aware – some misrepresentation by UBS is an obvious example – and I doubt whether any law firm would have been willing in effect to guarantee the enforceability of the STCDO regardless of such possibilities.
360.	This was the very day on which senior management approval was finally given and the contracts were to be signed. There was considerable internal pressure at UBS for this to happen, with Mr Heininger and Dr Schirmer waiting at UBS’s office. The opinion was accepted in this form. Mr Lancaster’s evidence was that the decision to do so would probably have been taken by UBS’s legal department. However, there is no evidence about this, or what the thinking was of whosever decision it was. It is, however, a reasonable inference that somebody must have decided that with an opinion in this form, the transaction could go ahead. 
361.	The final Freshfields opinion addressed to UBS was signed by Dr Reichert-Facilides and issued dated 8 June 2006.
362.	Meanwhile on 7 June 2006 Freshfields issued its final opinion to KWL. Unlike the opinion addressed to UBS, this remained expressly subject to an assumption (to be confirmed by KWL’s economic advisers) that the transaction “reduces overall the risk in economic terms of a financial burden for KWL in connection with the Equity Defeasance in consideration of all of the relevant parameters” but, even so, continued to express the opinions set out in the earlier draft and summarised above (see [333] and [334] above), in particular that it was “open to question” whether a resolution of KWL's Supervisory Board was required.
363.	Mr Lancaster was cross examined by Mr Lord by reference to later events in March 2007, when Depfa asked for clarification of or amendments to a draft Freshfields opinion to be addressed to Depfa which on this point was in the same form as the opinion issued to UBS. At that time Depfa had pointed out that the opinion did not say whether Supervisory Board approval was needed. Mr Lancaster commented in an email to Mr Blatz that:
"Looks like Freshfields did not address that no supervisory board approval is required. Sticking point for Depfa. Can you push them to include.” 
364.	He made the same request to Freshfields directly. However, Freshfields did not include any such statement in their opinion to Depfa.
365.	Based on these later exchanges, it was suggested to Mr Lancaster and he agreed “that the risk as to Supervisory Board approval being necessary must have been a risk which was being taken by the investment banks, so that's UBS and Depfa, isn't it?” I consider below the position as it was at the time of the Depfa transaction in March 2007. However, at the time of the Balaba transaction in June 2006 there had been no express request to Freshfields to include a statement in their opinion that Supervisory Board approval was unnecessary, although there had been issues concerning the relevance of KWL’s motivation for the transaction (the initial assumption (k)) and the question of enforceability.
366.	KWL submits that UBS knew in June 2006 that the Freshfields opinion was equivocal, saying nothing about the need for Supervisory Board approval, but that UBS was prepared nevertheless to take the risk. I do not accept this.
367.	As explained in more detail below, the effect of German law, which is agreed to be the relevant law, is that the question of KWL’s capacity or the authority of the managing directors to commit KWL does not depend on the nature of the transaction as a derivative, but on two matters. The first is whether the transaction was “of fundamental significance” to KWL. If so, under KWL’s Articles of Association the prior approval of the Supervisory Board was required. If not, the managing directors had authority without needing such approval. The second matter is whether, assuming that prior Supervisory Board approval was required under the Articles, this was so obvious to UBS that it could not have failed to realise this. Essentially the standard is one of gross negligence, a failure to see what was plainly there to see. 
368.	The Freshfields capacity opinion provided to UBS is therefore of critical importance to this issue. On their face the opinions (b) and (c) set out above appear to say that KWL did have capacity and that UBS need not be concerned with any issue of Mr Heininger’s and Dr Schirmer’s authority unless it was guilty of “fraudulent collusion” (which KWL has not suggested). Unless those statements were heavily qualified elsewhere in the opinion, or were falsified by the surrounding circumstances, in ways which ought to have brought home to UBS that Mr Heininger and Dr Schirmer did not have authority to bind KWL to this transaction, UBS can hardly have been grossly negligent if it relied on what Freshfields told it.
Execution of the Balaba transaction
369.	As already indicated, the contracts were signed on 7 June 2006 after senior management approval had finally been obtained. The parties celebrated with dinner at a restaurant. The Balaba transaction then traded on 8 June 2006 with UBS conducting an auction of the CDS hedges for the portfolio. The auction was successful, with the result that KWL received a net premium of US $21.1 million (higher than the US $20 million for which KWL had stipulated) and tranche subordination of 3.6% which was also slightly better than had been anticipated. The premium was paid into KWL’s account at Wilmington Trust in the United States from which (unknown to UBS) it was subsequently extracted and distributed among Mr Heininger, Mr Senf and Mr Blatz.

370.	Accordingly the contract documentation, including the figures which resulted from the auction, was eventually dated 8 June 2006.  The gross STCDO premium figure of US $22.7 million was included in the contract and was therefore available for Dr Schirmer to see, but it appears that he did not see it and continued under the mistaken impression that there was no immediate upfront cash premium. 
Congratulations to Mr Bracy and further development of the Value Partners relationship
371.	The atmosphere at UBS among the deal team and senior management was euphoric. Many plaudits were handed out, to Mr Bracy in particular, encouraging him to foster his relationship with Value Partners and to keep up the good work with a view to further similar transactions. He had successfully achieved the visibility to senior management which he had predicted would be the result of the escalation of the decision making process (see [304] above).
372.	This is of some importance because it is UBS’s case that in at least some aspects of his later dealings with Value Partners (in particular his response to the “letter for K” episode: see [456] below) Mr Bracy was not acting on behalf of UBS and his dealings had no connection with any tasks which he was authorised to perform for UBS. That issue needs to be seen in the context that in the warm glow of a transaction which had made a profit of some US $20 million for UBS, Mr Bracy was encouraged by the most senior management of the bank to develop the relationship with Value Partners and was given a free hand to do so with no real supervision of his activities.
373.	Thus on the evening of 8 June 2006 Mr Bracy’s boss, Mr Shulman, sent him a note, copied to Mr Bunce, Mr Ryan and others:
“to tell you that we appreciate your efforts in helping to drive this transaction and working closely with the product groups to help this trade come to fruition. It is this type of collaborative effort that we in the IB want to see, and we want to ensure that you have the confidence in the system to understand that senior management across FIRC recognizes this contribution. This effort and your involvement as well as others in Europe will also be highlighted at the weekly Fixed Income Executive Committee. On behalf of the management team here, we thank you and hope that you will continue to push intra-divisional opportunities both domestically and internationally.” 
374.	Mr Ryan added his own congratulations. 
375.	Mr Bracy’s name was indeed mentioned at UBS’s Fixed Income Executive Committee meeting, the UBS equivalent of being mentioned in despatches, and Mr Bunce subsequently wrote to tell him so, thanking him for his “significant contributions to our business area” and observing that his “commitment, drive and focus [were] vital to the continued success of Fixed Income”.
376.	Mr Bracy was evidently pleased with these messages as he forwarded them to his friend Mr Maron (as to whom see [190] above), commenting that if he could not get Mr Maron a job offer now he would never be able to do so.
377.	Mr Czekalowski too was in congratulatory mode, telling Mr Bracy and Mr Sanz-Paris: 
“It has been a long, hard road and feels like the payoff is just getting started, so keep up the good work !!”
378.	On 9 June 2006 Mr Ryan followed up his earlier congratulations with a further email to Mr Bracy, copied to (among others) Mr Bunce and Mr Czekalowski:
“Please help us stay connected to Value Partners and involved with future transactions. Nice work.”
379.	Mr Bracy, not resting on his laurels, took the opportunity to respond to Mr Ryan:
“Actually, it is funny you mentioned that. I know from first hand experience when I worked with a couple of the principals from v-partners, and as they demonstrated with KWL, these guys have a very loyal client base.”
380.	He mentioned other prospective deals on which Value Partners was working with other clients, as well as other deals in Leipzig which Mr Heininger (not mentioned by name) had suggested could be steered to UBS. He asked Mr Ryan to meet Mr Senf and Mr Blatz in New York on 27 and 28 June, saying that it was important for them to see UBS’s “senior management support of their efforts” and added:
“Moreover, goldman and other firms have approached them to form a strategic partnership, amongst other, but they are loyal to us. I think it would be great to have a conversation with them on how to properly incent them to continue to bring us opportunities.”
381.	This was a revival of the earlier proposal that Value Partners should be paid by UBS (see [214] above), although whereas that had been specifically about payment for recommending UBS GAM as portfolio manager, this was more general. It was perfectly clear that the “opportunities” which Mr Bracy was suggesting that Value Partners should be incentivised to bring to UBS were opportunities to do deals with clients for whom Value Partners was purporting to act as an independent adviser. Mr Bracy evidently had not been deterred by being told that this involved an “appearance of impropriety”. 
382.	Ms Short saw the point immediately when she was shown this email in cross examination:
“Q (by Mr Lord).  I can see from your reaction, Ms Short, that you're not impressed by that email, are you?
A.  Well, they seem to be moving from a position of being an adviser to the client to being an introducer or arranger of business for us.”
383.	The effect of this email was that UBS’s senior management, in the person of Mr Ryan, was aware of Mr Bracy’s inappropriate approach to the relationship with Value Partners which he was being asked to foster and aware too of Mr Bracy’s inability or unwillingness to recognise obvious conflicts of interest.
384.	Mr Bracy wanted Value Partners to appreciate his efforts on its behalf within UBS. He forwarded to Mr Senf the message which he had sent to Mr Ryan, with the comment:
“FYI - Berthold I aim to make you smile.”
385.	Mr Ryan might have been expected firmly to squash Mr Bracy’s proposal to incentivise Value Partners in this way. However, he did not. He recognised that what Mr Bracy was proposing was unworkable, but suggested that there might be ways of working round this:
“Very encouraging on the new business front. 
On the incentive side, there might be conflicts if we paid them for advising their clients to give business to us. Perhaps a broad cross referencing arrangement might be better or there may be other ways we could create value for them. If you would like, I would be glad to meet with them to discuss ways UBS could help Value Partners. Let me know if this would be helpful.
Congratulations again. Please keep up the great cross business work. You are making a really good impression on David, Simon, Suneel, myself and others with your entrepreneurship.”
386.	Mr Ryan was not a witness, but he must have realised that there would (and not just “might”) be conflicts of interest in what Mr Bracy was proposing. He must have realised also that dressing up an incentive by benefiting Value Partners in some other way would be equally unacceptable.
387.	Mr Bracy was encouraged, but recognised that the idea of a direct payment to Value Partners would not work, not because he saw anything wrong with the idea but because UBS’s “internal control functions” would not allow it. He appears to have realised that it was time to retreat a little, responding to Mr Ryan that:
“With respect to the incentive issue, I am aware that it is best internally with our control functions that they should not be compensated directly by us for introducing us to business opportunities. I am confident that my long relationship with them, as well as the mutually beneficial opportunities for both firm[s] will ‘keep them in the fold’. However, I do think it is important that they see directly that senior management values their contribution(s), and if there is any way that we can assist them as a firm without creating a potential conflict situation that would go a long way as well. …”
388.	It was left that Mr Ryan would meet Mr Senf and Mr Blatz when they came to New York.
389.	Another senior UBS executive was Mr Kamlani (the “Suneel” mentioned by Mr Ryan: see [385] above). He too added his congratulations in an email to Mr Bracy and the deal team which he copied to Mr Bunce and Mr Ryan:
“A number of emails have already been sent on this innovative and mile stone deal in Germany. I just wanted to reinforce the message that this collaborative effort across CFI, DCM and Munis was outstanding and resulted in a highly valuable transaction for our client. There is hopefully another leg of this trade to execute shortly. Great work by everyone in discovering this opportunity, marketing the advisor/client, and structuring an innovative transaction.”
390.	This message is inconsistent with UBS’s case that it did not market the transaction but merely executed a deal which was brought to it by Value Partners. Although Mr Kamlani had no personal knowledge of the origin of the transaction, it is clear that Mr Bracy was keen, despite his evidence that he had played no marketing role, to claim maximum credit for having marketed the transaction to Value Partners and UBS.
KWL’s further engagement of Value Partners
391.	Although there was already an engagement letter in place between KWL and Value Partners, signed by Mr Heininger and Dr Schirmer, pursuant to which Value Partners was entitled to a “success based” fee equivalent to about US $7.875 million (see [212] above), KWL and Value Partners entered into a further engagement letter, dated 31 May 2006 but signed by Mr Heininger and Dr Schirmer on 14 June 2006. This recorded that “KWL's main objective in doing this transaction is to diversify the risk of its underlying crossborder lease portefeuille”. It purported substantially to increase the already impressive fee to which Value Partners was entitled to include all proceeds of the transactions in excess of €4.5 million:
“The restructuring and risk diversification of KWL's currently existing cross-border lease portefeuille will generate for the benefit of KWL an interest rate advantage over the term of the transaction. VPG hereby guarantees that the generated interest rate advantage will amount to at least €4.5 million. Depending on the development of the underlying credit portefeuille KWL may decide to distribute parts of the benefit during the term of the Transaction. Any additional interest rate advantage in excess of the €4.5 million will be for the benefit of VPG to cover any related fees and expenses. In addition, VPG agrees to cover any first year losses deriving from the Transaction up to an amount of USD 6.5 million.”
392.	Dr Schirmer denied that he had signed this letter but he plainly had, as the German criminal court in Dresden also found. By the time this letter was signed it was already known (to Mr Heininger and Value Partners although not to Dr Schirmer) that the transaction would not generate “an interest rate advantage over the term of the transaction” but an upfront premium, the net amount of which for the Balaba transaction alone was US $21.1 million. Therefore this letter on its face not only substantially increased the fee to which Value Partners was entitled on that transaction as well as entitling it to the entirety of any premium earned on the remaining legs, leaving only a small fraction of the total for KWL, but did so in a misleading way. The letter was also misleading in stating that KWL’s main objective had been risk diversification when Dr Schirmer’s evidence was that it was to raise finance. I find that Dr Schirmer signed the letter because he was prepared to do what Mr Heininger asked him to do, without asking questions even though it was in a language which he did not understand, and in all probability without attempting to understand what he was signing.
Value Partners’ visit to Mr Ryan
393.	Mr Senf and Mr Blatz visited the United States on 27 June 2006 and (with Mr Bracy) met Mr Ryan in Stamford, Connecticut. Mr Blatz explained the purpose of the trip as he saw it in an email to his colleague Mr Cox:
“[Mr Ryan] is the boss of the bosses boss boss. He wrote to Steve after we closed the deal that UBS should keep well connected to VPG. Our idea is to figure out whether they are willing to pay some money in order for us to bring deals to UBS instead of Goldman etc.”
394.	This email was sent when Mr Senf and Mr Blatz were travelling with Mr Bracy in an impressively large car which Mr Bracy had arranged. I am confident that Mr Bracy knew exactly how Mr Blatz regarded the matter.
395.	Although nothing concrete came of the meeting with Mr Ryan, Mr Bracy reported to Mr Kraus that it had gone well:
“The meeting with chris went well. He was impressed with our collective efforts and he got along well with juergen and berthold. He is very supportive of future joint ventures with them.”
396.	Apparently the evening’s entertainment (arranged as usual by the lawyer Richard Isgard: see [208] above) did not go so well, for reasons which it was unnecessary to explore at the trial, and Mr Bracy decided to pay for this out of his own pocket. Other aspects of the trip (the car and dinner), however, were charged by Mr Bracy to KWL, even though the trip had nothing to do with KWL. This was relatively small scale, but nevertheless blatant, dishonesty on his part.
397.	Mr Blatz emailed Mr Ryan on his return to Europe to thank him for the meeting:
“It was a pleasure to meet you last Tuesday. We strongly believe that we have lined-up excellent business opportunities which we would like to push along with you and your colleagues.”
398.	Evidently the sense of the meeting was that UBS and Value Partners would work together (“collective efforts”, “future joint ventures”, albeit such expressions were not used in any formal sense) to bring Value Partners’ clients to UBS. It was Mr Bracy on behalf of UBS who was to have charge of that relationship. (Later, when Mr Ryan met Value Partners in September 2006, he described Mr Bracy as “your point guy at UBS”). It was against this background that on 11 July 2006 Mr Bracy forwarded to Value Partners the prospective client list which he had obtained from his friend Mr Maron (see [190] above).
Further Value Partners’ deals
399.	Mr Bracy continued to pursue other deals with Value Partners, including a prospective transaction between UBS and the City of Zurich, for which Mr Bracy envisaged a profit to UBS of US $40 to US $60 million. It is apparent from an email which he sent to Mr Blatz on 22 August 2006 that his arrangement with Value Partners was as already described, that is to say that Value Partners’ agreed role was to direct the business to UBS. On this occasion, however, Mr Bracy was concerned because the Zurich client with whom Value Partners had influence (someone called “Beat”) might not be the person with authority to decide where the business should go:
“… the city of zurich when they do swaps does it through a local bank when the treasurer does the deals. The concern is that if it is a swap that it would fall outside of beat's jurisdiction and thus, outside your mandate and thus outside your control to direct the business to us (as opposed to a competitor who the treasurer likes). I said that I believe that it would be viewed as part of a leasing transaction which is under beats jurisdiction ultimately and thus things should be along the lines we discussed.”
400.	Mr Bracy’s phrase “your control to direct the business to us” sums up succinctly the relationship with Value Partners. 
401.	So too did a later email, dated 30 September 2006, discussing a possible transaction with the French railway company SNCF, in which Mr Bracy expressed concern at the idea that UBS might actually have to compete with other banks for business with a Value Partners client:
“One question I have is that if you guys get the mandate are you suggesting that we will have to compete with JP and Citi. I had assumed that if you have the mandate then you guys can ‘direct’ the business where you desire.”
402.	Mr. Cox confirmed that this assumption was correct, stating:
“When we are mandated we will have an exclusive mandate for the lease. We would have the opportunity of steering SNCF in the right direction on defeasance but cannot guarantee that we can always get our preferred choice in. What I would like to do is present SNCF with the structure which UBS will do and hopefully that will get you guys in ahead of JPM et al. There will be limited time when we get the mandate so if we can get the UBS structure up and running first off then I don’t think there would be the time to bid it round.”
403.	Mr Bracy was suitably reassured. The idea, therefore, was that Value Partners would attempt to prepare ahead of time with UBS a transaction that would allow UBS to pre-empt its rivals, and would then steer the transaction to UBS before the other banks had the opportunity to develop a competing bid. That was not consistent with the provision of disinterested financial advice by Value Partners to SNCF as its principal. Mr Bracy cannot have failed to appreciate this. 
404.	Another concern for Mr Bracy was that Mr Jordan (who was aggrieved that he had been kept away from the KWL deal: see [42] above) was seeking to intervene on the Zurich deal, an intervention which Mr Bracy was determined to prevent. He was also unhappy about some of the questions which Mr Jordan was asking, as he reported to Mr Sanz-Paris on 22 August 2006:
“I had lunch with phillip. At first he was sniffing about how and how much v-partners got paid. I played dumb basically I said not my issue or concern. He suggested maybe during our compliance process we might have discussed.”
405.	Although Mr Bracy and Mr Sanz-Paris both denied having any knowledge of what Value Partners was being paid for the KWL transaction, this message strongly suggests that they both had at least a good idea. If not, Mr Bracy would not have needed to “play dumb”. I would not go so far as to find that they knew any precise figures, but I do find that they both knew that Value Partners was being paid a very substantial fee which bore no real relationship to the services or advice that it had actually provided. (There is clear evidence in the case of the proposed Zurich deal that Mr Bracy and Mr Sanz-Paris both knew that Value Partners stood to get for itself a substantial proportion of the upfront premium). They knew too that Mr Senf and Mr Blatz had been anxious to keep Dr Schirmer in the dark about the premium being earned from the deal, and must therefore have realised that it was because of their relationship with Mr Heininger that they were able to extract such a high fee. 
406.	Ultimately, however, and despite the big promises, nothing further came of any such Zurich, SNCF or any other similar Value Partners deal. 
The search for an intermediary bank
407.	The structure of the KWL deal was now set and the Balaba transaction had been completed, but it remained to find a bank willing to act as an intermediary between UBS and KWL for the remaining transactions. During June and July 2006 UBS approached a large number of German banks. Its general approach was to tell the prospective intermediary that it would bear no market risk, only credit and reputational risk, and that the CDO tranche risk would be transferred back to UBS. It proved difficult, however, to arouse much interest. By the end of August there were only two banks interested. One was Dresdner Bank, which dropped out shortly afterwards on 4 September. The other was LBBW, which at that stage was only interested in intermediating the GECC transaction.
Discussions with LBBW
408.	UBS first approached LBBW on or about 14 July 2006. LBBW was interested, although this was a new product for it, and discussions took place during July and August. The discussions were between UBS and LBBW, with very limited contact between LBBW and KWL, although LBBW did ask Mr Heininger to send KWL’s latest balance sheets. There was also a telephone conversation on 6 September 2006 between LBBW and Mr Heininger, as part of LBBW’s due diligence process, in which LBBW discussed with Mr Heininger a number of the risks to which KWL would be exposed. Mr Bracy was not involved in any of the discussions with LBBW, although he remained the link between the UBS deal team in London and Value Partners and was active in impressing on the deal team KWL’s desire to have matters concluded before its Supervisory Board meeting on 7 September.
409.	UBS first made contact with LBBW to discuss the possibility of LBBW acting as an intermediary in future transactions with KWL through an approach by Mr Czekalowski to Mr Northway of LBBW. This was immediately followed by Mr Lancaster sending a package of draft documentation to Elizabeth Fritschi of LBBW, explaining that the “intermediation opportunity was with KWL” and giving an outline of how the transaction would work. He explained that LBBW would conclude three separate STCDOs buying protection from KWL, and that in each case the “CDO risk is transferred back to UBS via a single back to back swap”. In order to minimise LBBW’s operational burden and the risk of any mismatches (i.e. in the amounts which might be payable), UBS would be appointed as “Calculation Agent” under both the Front and Back Swaps.
410.	On 18 July 2006 there was a telephone conversation between Mr Kraus of UBS and Mrs Gesine Schmidt of LBBW. Mrs Schmidt said that it was unusual for a municipal water company to be selling credit protection and asked if UBS had a legal opinion as to the enforceability of the transaction. Mr Kraus replied that UBS had a capacity opinion from Freshfields and another from Allen & Overy. He said that he would check whether these could be provided to LBBW, but did not go so far as to promise that they would be. He explained some of the background to the transaction, saying that KWL had entered into it “from a risk consideration point of view, but also and maybe also a little bit more from a return consideration point of view”. He explained also that if KWL had approached UBS to sell protection solely to generate premium, that would have been blocked by UBS’s internal control functions, but the element of hedging a single name risk had made a difference and also enabled the lawyers to justify the deal from a capacity and suitability point of view.
411.	Following this conversation, the background as explained by UBS to LBBW was set out in a memo from Mrs Schmidt to Mr Falk Weishaupt, the LBBW lawyer who was to work on the transaction. This explanation was that in order to minimise the existing concentration risk on KWL’s single name bonds, UBS had sold CDS protection to KWL, and KWL in return would sell protection on three CDO tranches managed by UBS with a portfolio of entities rated AA-; UBS had completed one such transaction with KWL and now had no credit lines left for KWL, which was why it was now looking for an intermediary for the remaining tranches. What was proposed, as LBBW understood it, was that:
“We purchase protection from KWL with three CDS on three CDO tranches, including 2 zero-coupons, see swaps confirmations. USB then purchases protection from us on the same CDO-tranches. UBS is the portfolio manager of the CDOs as well as the calculation agent for all swaps.”
412.	After some initial consideration of this proposal, LBBW decided that it was not really interested as the fee which UBS was then offering was not high enough to represent a worthwhile use of LBBW’s own credit lines. However, in a telephone conversation between Mr Sanz-Paris and Mrs Schmidt on 9 August, Mr Sanz-Paris indicated that UBS could probably increase this fee to 1.5 million (although he appears to have meant US dollars and Mrs Schmidt thought he meant euros) just for the GECC transaction. That was of more interest to LBBW and the discussions continued. 
413.	By 15 August 2006 Mr Heininger had returned from his summer holiday and was putting pressure on Mr Bracy for the transaction to be completed. He said that he wanted this to happen before notice of the agenda for the September Supervisory Board meeting had to be sent out to board members, so that the notice could say that the transaction had closed, with details to be discussed at the meeting. On the same day Mr Sanz-Paris passed on to Mrs Schmidt that the transaction had to close by the end of August or at latest in the first week of September, before KWL’s Supervisory Board meeting. It was therefore apparent that the Supervisory Board would not be asked to approve the LBBW transaction before it closed. 
414.	LBBW, including both Mrs Schmidt and Mr Weishaupt, understood that it was critical in any derivative transaction with a municipal enterprise as a counterparty to ensure that the enterprise was capable of entering into such a transaction, which would need to be checked by examining its corporate formation documents. Mr Weishaupt’s focus here was on the nature of the transaction rather than the separate question as to the authority of particular individuals to commit the enterprise to the transaction in question. From an early stage of the negotiations with UBS, LBBW was alive to the fact that capacity needed to be checked. It was to become a question in those negotiations whether the risk as between UBS and LBBW that KWL might not have capacity (in other words, whether LBBW would be liable to pay UBS under the Back Swap even if KWL did not have capacity to conclude the Front Swap) was a risk to be borne by LBBW or UBS.
415.	This was first discussed in a telephone conversation on 18 August 2006 between Mr Weishaupt and Mr Alex Davies of UBS (who was handling the matter during Mr Lancaster’s absence on holiday). Mr Weishaupt said that the risk that a municipal entity might not be able to conclude any swaps at all should be with UBS, which already bore this risk on its previous transaction with KWL. However, nothing was agreed about this.
416.	It was probably this conversation which led to an email from Mrs Schmidt to Mr Sanz-Paris and others on 22 August 2006 in which she purported to set out her understanding of three points, asking Mr Sanz-Paris to say if he had a different understanding. She could not recall, however, from where she got this understanding. In my judgment it was not from anything which UBS had said. I consider that this was really a negotiating position, stating what she hoped to achieve on behalf of LBBW, rather than anything which she understood had already been agreed. The first point, echoing Mr Weishaupt’s argument, was that:
“UBS will bear risk that KWL has no authority to enter into these transactions (ultra vires) due to the fact that UBS checked this issue already for its own transactions and feels comfortable with the informations received.”
417.	Mr Davies reacted strongly within UBS, saying that he did not agree with this. Mr Sanz-Paris (away from the office on paternity leave) said that he thought there would be a problem. UBS’s response, sent by Mr Davies on 23 August 2006, was therefore firm in rejecting Mrs Schmidt’s stated understanding:
“UBS will not bear this risk. We are comfortable that this is not a risk but LBBW must also make its own investigations.”
418.	Mrs Schmidt responded, also on 23 August 2006:
“I raised the ultra vires issue with Tilo several weeks ago and he confirmed that there are legal opinions from external lawyers confirming that KWL has the right to enter into these contracts and that we will see these opinions. It was never raised that we have to get our own opinion on this issue. Therefore, please let us discuss.”
419.	The reference to having raised the ultra vires issue with Tilo (Mr Kraus) was a reference to the telephone conversation of 18 July 2006 (see [410] above). However, Mrs Schmidt’s characterisation of that conversation was not really fair. Mr Kraus had said no more than that he would check if the legal opinions which UBS already had could be disclosed. He had never followed this up but, on the other hand, Mrs Schmidt’s reaction at the time had suggested that this was not important to LBBW. In any event, it was clear from the exchanges so far that there was no agreement on the point. Hence the need for further discussion. 
420.	Mr Kraus responded on behalf of UBS the same day:
“As you correctly said, Freshfields has looked into this issue and issued a legal opinion. This legal opinion addresses the ultra vires issue and the required approvals. 
The client/Freshfields/UBS will share this opinion with LBBW, however, LBBW needs to evaluate the associated comfort on its own behalf. 
I hope this clarifies.”
421.	The discussion which Mrs Schmidt had proposed appears to have taken place in a telephone conversation between Mr Davies and Mrs Schmidt later on 23 August 2006 although (unlike some other calls) there is no transcript or other contemporary record of (or even reference to) it. Both of them gave evidence about this in their witness statements. 
422.	Mr Davies said that the outcome was that LBBW accepted that it was to bear any risk of KWL not having authority to enter the LBBW STCDO, albeit that UBS did not consider there to be any risk, and that it was for LBBW as the contract party facing KWL to satisfy itself generally that the STCDO would be valid and enforceable. In cross examination, however, Mr Davies (who was a candid and responsive witness) said that he did not remember the call or even whether it had taken place.
423.	Mrs Schmidt said, both in her witness statement and in cross examination, that she did not remember the substance of the call, but that it was her view that a legal opinion was essential and that, without one, LBBW would not have entered into the transaction. Mr Weishaupt said that he did not take part in the call, but remembered that once it had taken place the outcome was that LBBW needed a legal opinion.
424.	This is not a promising basis on which to make factual findings, but in the light of this evidence, the inherent probabilities and what happened before and after, I conclude that the telephone call did take place; that Mr Davies would not have accepted and did not accept that UBS would bear the risk that the LBBW Front Swap would be invalid; that for her part Mrs Schmidt would not have agreed and did not agree that LBBW would bear this risk; but that matters were left that the next step would be for LBBW to get a legal opinion from Freshfields similar to the opinion which UBS had obtained. There was, however, no express agreement as to any legal consequence which would flow from the fact that this next step would be taken. Meanwhile, the issue which had been raised about who was to bear the risk was effectively parked.
425.	The next thing that happened was that on 24 August 2006 Mr Davies sent a draft Freshfields capacity opinion to LBBW. The draft was not addressed to anyone, but Mr Davies explained that the final version would be addressed to LBBW. It was materially identical to the opinion given to UBS in June. Mr Weishaupt wanted the opinion to be addressed to LBBW as he at any rate now understood that the risk of the STCDO being invalid or unenforceable might be a risk which LBBW was taking. He wanted to ensure that Freshfields would be answerable to LBBW for their opinion and he was not prepared to go ahead with the transaction until he had an opinion which he regarded as satisfactory. This was, however, merely his understanding of the position.
426.	 Mr Weishaupt had some minor questions about the draft Freshfields opinion which he passed back to Mr Davies on 25 August 2006. A call between LBBW and Freshfields was arranged. In due course Freshfields issued a capacity opinion addressed to LBBW in materially the same terms as the opinion addressed to UBS for the Balaba transaction.
427.	Meanwhile LBBW’s formal request for credit approval was dated 23 August 2006. Its conclusion appears to show how those concerned at LBBW saw the deal, although Mrs Schmidt did not accept that this was indeed how the matter was viewed:
“The newly applied-for derivative deal is of a speculative nature and secures for KWL a short-term influx of liquidity. The risks generally consist in the default of a portfolio company and the corresponding credit default payment by KWL. For BW Bank / LBBW in summary there is the risk that in the event of a default by KWL and additionally the default of portfolio companies, the bank would have to pay corresponding default payments. 
Given the high significance of KWL for the region of Leipzig and the associated public interest in having a healthy company, but also due to the fact that KWL is one of the revenue generators in the shareholding portfolio of LVV, as investment company of the City of Leipzig, we consider the risk involved with this transaction as manageable and acceptable.”
428.	Thus LBBW recognised that the STCDO was a speculative investment for KWL, the benefit of which was an influx of short term liquidity. In fact, Mr Christoph Zengerling, an LBBW structurer, had given the file the codename of “Feuerwasser”, with the comment “after all, the water works are playing with fire here...” LBBW’s credit request recognised also a risk that in the event of a “default” by KWL, it would be liable to make payments to UBS. However, it considered the risk of default by KWL to be acceptably low. It did not address here what the position would be if KWL did not pay in circumstances where there was no “default” because KWL was under no liability to pay. Nor, for that matter, did it spell out that there could only be a “default” if there was an obligation to pay in the first place. Credit approval was given on 31 August 2006.
429.	As the deadline of 7 September 2006 approached, there remained various components of the deal still to put into place. LBBW appears to have been under the impression, at least at one stage, that the deadline existed because there was an existing KWL board approval which would expire if the deal was not concluded by then, so that KWL would have to begin its internal approval process all over again. However, it is not clear on what this understanding was based. It was not correct. I am unable to find that this was information given to LBBW by UBS, although Mr Sanz-Paris had said back on 15 August that KWL wanted to conclude the deal before its Supervisory Board meeting on 7 September and it may have been a misunderstanding of something which he or someone else had said. 
430.	On 4 September 2006 Mr Heininger and Mr Reichardt arrived at UBS’s offices in London in order to sign the documents for the LBBW transaction. The plan was that this would be executed, but LBBW was not yet ready to proceed. Accordingly they signed draft documents, to become binding only once matters were finalised.  
431.	One issue which arose at this stage was that LBBW’s internal approval process had required that the STCDO would receive an Aa3 rating. However, this could not be reconciled with KWL’s premium requirements (namely that it should receive a premium of about US $8 million although, as explained at [392] above, this was in fact entirely for the benefit of Value Partners, as Mr Heininger knew: in fact the net premium from the LBBW transaction was €6.4 million). The solution adopted was to extend the term of the STCDO from eight to ten years, which would enable a higher premium to be achieved (reflecting the fact that exposure to the tranche would exist for a longer period). In exchange for this LBBW was able to negotiate an increase of €500,000 in its fee, which was eventually fixed at €2 million for the GECC transaction alone.
432.	Another point which was important for LBBW was to have direct contact with KWL as part of its due diligence process. This took place in a telephone conversation on 6 September 2006 between Mr Northway, Mrs Schmidt and Mr Heininger. In the call, summarised in an email of the same day, Mr Northway discussed with Mr Heininger a number of risks, including the facts that KWL would bear the default risk of the entities in the portfolio and might lose the full amount of the notional, that there was a thin tranche structure with an attachment point of 3.6%, that the initial subordination might be reduced with no chance to rebuild, that ratings were a matter of opinion and that ratings of synthetic products were particularly volatile, and that it was for KWL to satisfy itself about any conflict of interest which might exist within UBS. I see no reason to doubt that Mr Heininger understood these points. LBBW followed this call with the email summary referred to above to which was attached a presentation which had been prepared by UBS (a version of what UBS had sent KWL in respect of the Balaba deal, but adapted for the LBBW deal) and a risk disclosure letter for KWL to sign which referred (among other things) to KWL’s acceptance of “the speculative nature of the Transaction”. Mr Heininger and Dr Schirmer signed this and returned it to KWL.
433.	Yet another point which LBBW wanted to check arose out of the fact that whereas the Back Swap with UBS was to be subject to an ISDA Master Agreement, the Front Swap with KWL was to be subject to a German Master Agreement (a Rahamenvertrag). There was therefore the possibility that the two swaps might not be fully back to back, with different calculations needing to be made under each of them. By an email to UBS dated 6 September 2006, LBBW requested UBS to check this point with Allen & Overy:
“Pls have Allen and Overy confirm that the vanilla swaps and the back to back swap match, that is, that the risk of the underlying under the swap we enter into with ubs is passed on KWL, leaving LBBW with the credit risk of KWL only”. 
434.	Mr Lancaster said that he would try to obtain this. In the event Allen & Overy gave a cautious reply, although sufficient to satisfy LBBW:
“I can confirm that the terms of the scheduled payment obligations under paragraph 2 (Fixed payments) and paragraph 3 (Floating payment) of the back to back swap confirmation match the terms of the scheduled payment obligations under paragraph B2 (Fixed payments) and paragraph (B)3 (Floating payment) of the CDO CDS.
There will be some basis risk arising as a result of using different master agreements to govern the two transactions and therefore I express no opinion as to the payment flows on any early termination of the back to back swap or the CDO CDS (arising as a result of a termination event or an event of default.”
435.	Both parties attach significance to this exchange. LBBW relies on it as showing an understanding that LBBW was intended only to bear the credit risk of KWL (“leaving LBBW with the credit risk of KWL only”, although its case is that in fact, on the true construction of the Back Swap, it did not bear that risk in the event of Early Termination of the Front Swap: see [829] below), leaving other risks with UBS. UBS relies on it as showing that although they were intended to be aligned as far as possible, the Front and Back Swaps were nevertheless understood to be two independent transactions and that, far from LBBW’s liability to UBS being dependent on KWL’s liability to LBBW (let alone actual payment by KWL), it was recognised that the sums payable under the two contracts might be different.
436.	However, after the telephone conversation of 23 August 2006 (see [424] above), nothing further was said expressly by either LBBW or UBS about which of them would bear the risk of invalidity of the Front Swap.
437.	The LBBW transaction finally closed on 7 September 2006.
KWL’s Supervisory Board meeting of 7 September 2006
438.	On 7 September 2006 KWL’s Supervisory Board met. It was preceded by a meeting of the Finance & Construction Committee, consisting of four members of the Supervisory Board and attended by Mr Heininger and Dr Schirmer. The role of this specialised committee was to consider (among other things) any financial issues and to draw the attention of the board to any matters of particular concern. At both meetings Mr Heininger made a presentation, entitled “Further risk minimisation and optimisation of the existing CBL agreements”. However, instead of using the slides which Mr Sanz-Paris had sent him on 8 June 2006, which he had promised to use (see [322] above), and which UBS had subsequently translated into German for KWL’s benefit, Mr Heininger used a presentation of his own devising. After a brief summary of the existing cross-border lease arrangements, it contained little more than a definition of “credit derivative” taken from Wikipedia stating that such a derivative “practically operates like insurance cover”, and a list of eight “advantages” of such a transaction. These included: 
“2. Diversification of hypothetical risk … 
6. KWL receives interest yield as additional remuneration …
8. For the next few years, KWL will receive guaranteed minimum interest yield of about € 4.5 mill.”
439.	The presentation said nothing at all to suggest that there was any risk involved. 
440.	This was thoroughly misleading. Not only was there no mention of any possibility of risk, there was no mention either of the premium which KWL had (or ought to have) received. Instead it claimed that KWL would receive about €4.5 million in the form of interest payments over time (a figure which corresponded with the figure in the Value Partners engagement letter: see [391] above), with no mention of the role played by, or the remuneration of, Value Partners. Indeed the presentation did not even spell out that KWL had by now concluded two such transactions, with UBS and with LBBW. It ought to have been apparent from advantage number 8 that the presentation was referring to a concluded (as distinct from potential future) transaction, but it appears that the Finance Committee and Supervisory Board members failed to appreciate this. Although Dr Schirmer, who was present, had not grasped that an upfront premium had been paid, and therefore did not realise that the reference to interest payments over time was misleading, he was content to allow Mr Heininger to mislead the committee and board members in other respects and did not intervene to clarify anything which Mr Heininger said (see [93] above). 
441.	Amazingly, it seems that no member of the Supervisory Board or the Finance Committee asked a single question about why Mr Heininger was making this presentation. Mr Müller’s evidence, for example, came to this, that he did not know why the presentation was being made, did not understand it, and did not ask any questions. Nobody asked what stage matters had reached. Nobody asked whether Supervisory Board approval was being or would be sought, and if not, why not. Nobody questioned how “optimisation” and “minimisation” of risk which was in the nature of insurance could actually earn KWL €4.5 million, rather than cost money. Nobody asked for any additional explanation or analysis of any risks involved or disadvantages which might need to be set against the advantages listed by Mr Heininger. The members of the Supervisory Board and the Finance Committee failed completely to ask even basic questions. Their reaction represented an abject failure to exercise any form of supervision of or oversight over the managing directors.
442.	 In due course minutes of these meetings were produced. The Supervisory Board minute (provided to UBS) stated:
“Agenda Item 10 Further Risk Minimisation and Optimisation of the existing CBL contracts 
Mr Heininger explains in detail, with help of the handout, the UBS transaction to minimise and optimise the risk of existing CBL contracts. 
The Supervisory Board notes the statements.”

443.	The Finance Committee minute went slightly further, recording the committee’s approval of the presentation:
“Further risk minimisation and optimisation of the existing CBL agreements 
Mr Heininger explains, on the basis of the attached presentation, the transaction with UBS to minimise risk and optimise the existing CBL agreements. 
The Construction and Finance Committee approvingly notes the statements.”
444.	This ought to have made it clear that Mr Heininger had indeed been referring to an actual transaction with UBS, but again no member of the board requested clarification. What the Finance Committee thought that it was approving must remain a mystery. It is not even clear to what extent board or committee members even read the minutes. Mr Müller’s evidence, for example, was that despite voting to approve the board minutes as an accurate record, he did not even bother to read them. Nor, it seems, did any board member pick up on or seek clarification of the references to a contract with UBS in the PwC report referred to at [453] below or in KWL’s accounts for 2006, produced in March 2007. In the event it appears that the board members continued in ignorance of the existence of the STCDOs concluded with UBS and LBBW.
The expenses scandal
445.	A little later in September, articles began appearing in the Leipzig press (with an occasional mention in Bild-Zeitung, a national newspaper) questioning the conduct of Mr Heininger and Dr Schirmer regarding various business trips and expenses, including a Concorde flight to New York by Mr Heininger and Dr Schirmer in 2002 and a trip by Mr Heininger to a luxury hotel in Dubai in 2003, paid for in both cases by Mr Senf’s and Mr Blatz’s former company, Global Capital Finance. There were also allegations about expensive watches said to have been given to Mr Heininger. These were, at any rate by the standards of investment banking, not matters of great significance. Mr Geoghegan of Depfa, an experienced banker whose evidence was not criticised by any party, said this about them (he was contrasting what was in the newspapers with what became known to Mr Bracy in the course of the “letter for K” episode described below):
“It is quite common for local newspapers to try to latch on to small expense irregularities among public officials. It happens here, it happens in Ireland, I am sure it happens in Germany.”
446.	He expanded on this view as follows:
“Q (by Lord Falconer). So can I take it from that that you would have known that had you read the newspaper articles first of all that there were very substantial numbers of allegations in the German press alleging corruption against Mr Heininger and Dr Schirmer, the managing directors of KWL -- this is not dangerous territory for you to agree, that is what the newspaper articles –
A. I have a slightly different opinion to you on that.
Q. Okay.
A. Because my reading of the articles was that local newspapers had picked up potential expenses, one of which involved a trip to New York, albeit on Concorde, to close a transaction, as it turned out. Another involved, you know, a conference room meeting in Dubai. These are normal practice in the capital markets. Now, a person who is not involved in capital markets might read those as very unusual: why would you be taking Concorde, why would you go to Dubai for a weekend? But every bank in the world entertains clients. Many people have to travel to New York at short notice to close transactions with particular deadlines. So your reading of that is -- my reading of it might be a little bit different to the way you are summarising.
Q. Okay.  Let's be clear about it. You wouldn't have been too bothered by the fact that people involved in the capital markets had taken Mr Heininger, say, that is the managing director of KWL, to Dubai, for a leisure trip?
A. It is common practice.
Q. It is common practice, and it wouldn't have undermined your faith in Mr Heininger?
A. On its own, it wouldn't.”
447.	Nevertheless, in Leipzig matters were viewed rather differently. The allegations in the newspapers were regarded very seriously and the constant press articles developed into a major scandal. On 20 September a Bild-Zeitung journalist, Willem Tell, fired off a series of questions in a freedom of information request which hit what proved to be a rather sensitive mark, including:
“4) Did Mr Klaus Heininger make business trips by Concorde to New York? If yes, for what reason? What were the costs of the Concorde flights? And: who paid for the flights? 
5) Was Mr Klaus Heininger also in Dubai and New York at the invitation of Global Capital Finance or its Swiss representatives, Berthold Senf or Herrn Lauterklos? If so, was he accompanied by his partner Susanna Schenck on these trips?”
448.	On 28 September 2006, the Mayor’s office in Leipzig requested KWL’s Supervisory Board to investigate, and the following day KWL announced that it would be conducting an immediate external audit of the allegations. The accountants PricewaterhouseCoopers were instructed to examine Mr Heininger’s and Dr Schirmer’s business trips. Although Mr Heininger and Dr Schirmer knew very well that the investigation was concerned with trips involving the predecessors of Value Partners, when they spoke to PwC they said nothing about the very substantial sums which Value Partners would earn as a result of the transactions with UBS and LBBW which had been the subject of very recent trips to London and New York with Value Partners.
449.	On 6 October 2006 there was a special meeting of the KWL Supervisory Board. The accountants presented an initial oral report and Mr Heininger and Dr Schirmer made statements. Mr Heininger said that the Dubai trip had been at the invitation of, and for the purpose of meeting, investors who were interested in providing investment capital to KWL. This was a lie and was shortly to be exposed as such, when Mr Heininger had to admit that there had been no such investors present. The Supervisory Board agreed that the investigation should continue. 
450.	It is therefore surprising, and indicates the sway which Mr Heininger appears to have been able to exercise over at least some members of the board, that on the same day the Chairman of the board, Dr Schirmbeck, issued a press release exonerating Mr Heininger and Dr Schirmer. It is not possible on the evidence to reach a firm conclusion as to why some board members were so willing to support Mr Heininger when other individuals had been suspended in the past when similar allegations had been made. It may have been because, under his leadership, KWL was achieving considerable financial success. Its 2006 accounts prepared in March 2007 described the 2006 financial year as the most successful year in KWL's corporate history, with an annual result before profit transfers exceeding both the previous year's results and forecasts. Or it may have had to do, as hinted at in some of the press comment, with political rivalry between different parties represented on the KWL Supervisory Board. These matters were not, however, explored in evidence, no doubt because of the limitations of KWL’s disclosure. Be that as it may, it was not suggested to Dr Schirmbeck when he gave evidence that he was in any way personally corrupt or complicit in the corruption emanating from Mr Senf and Mr Blatz.
451.	Mr Müller protested about the press release, saying that it did not reflect the conclusion of the meeting and was misleading to the public, but the proposed press conference went ahead anyway on 10 October 2006. Mr Heininger told the assembled press that the trip to Dubai had been for business reasons. Dr Schirmer said that the Concorde trip to New York had been necessary in order to achieve contract negotiations on the same day. Neither statement was true.
452.	Despite the press conference given by Mr Heininger and Dr Schirmer on 10 October 2006, press criticism of KWL’s management intensified. On 17 October Mr Heininger had to identify those who had participated in the Dubai trip and therefore had to admit that there had been no investors present. But it appears that the untruthfulness of his initial response either was not picked up or was ignored.
453.	Once PwC had produced their reports, a further Supervisory Board meeting was held on 8 November 2006. A careful reading of the PwC report on Dr Schirmer would have revealed that he had visited London for contract negotiations with UBS in May 2006 and for the closing of an agreement in June, described as a “financial investment”, and that the trip had been arranged by an employee of Value Partners, a company which had been formed by employees of Global Capital Finance. (Oddly there was no mention of this in the equivalent report on Mr Heininger). This ought to have rung alarm bells with the Supervisory Board, bearing in mind the concern about Global Capital Finance, but it did not. It is fair to say, however, that rather surprisingly PwC (who knew why they were being asked to carry out their investigation) did not draw particular attention to the fact that a new “financial investment” contract had been concluded in which employees of Global Capital Finance were involved.
454.	The conclusion of the Supervisory Board was set out in a press release issued on 8 November 2006. In brief, it decided that travelling first class and by Concorde was not appropriate for KWL management, that no gifts had been accepted, and that the statements about the trip to Dubai made by Mr Heininger should be accepted. These statements included that the invitation had come from the “arranger” of the cross-border leases (i.e. Global Capital Finance) which was contrary to his initial explanation, that “no further contractual relationships between the parties (investor, arranger, LVB)” had taken place, and that “no further such trips on invitations of the business partners had taken place”. This was deliberately misleading in view of the continuing relationship with Value Partners, the concluded Balaba and LBBW transactions in which Value Partners had been involved, the fact that Mr Heininger and Dr Schirmer had intended to go on the safari referred to below, and that it appears that trips with Mr Senf and Mr Blatz were sufficiently common for Mr Heininger to have described it as a trip “with a couple of friends (the usual ones)” (see [94] above). Dr Schirmer knew that what Mr Heininger was saying about the absence of further contractual relationships involving Value Partners was misleading but took no steps to correct him.   
455.	Despite its acceptance of Mr Heininger’s explanation, the Supervisory Board nevertheless reduced the performance-related element of his salary and he agreed to make a €20,000 donation to charity. But he and Dr Schirmer kept their jobs. This was not the end of the matter, as the Saxony anti corruption unit decided to open an investigation into KWL’s cross-border leases, but it did bring to an end for the time being the intense press speculation surrounding KWL and the position of Mr Heininger. 
The “letter for K”
456.	The problems faced by Mr Heininger led directly to what was referred to at the trial as the “letter for K” episode. On 5 October 2006 Mr Blatz spoke to Mr Bracy to request his help to get Mr Heininger out of trouble. He followed this the next day with a cautiously worded email:
“any more thoughts regarding yesterday's discussion? We informed our friend and he really appreciates your efforts!!!”
457.	The friend, of course, was Mr Heininger, although Mr Blatz was understandably cautious about mentioning his name in writing. In fact, what Mr Blatz was asking for was Mr Bracy’s help to find somebody who would provide a false explanation for the 2003 trip to Dubai. Mr Bracy responded with suggestions about people who might be able to help, commenting that they might be “uncomfortable” about doing so.
458.	Mr Blatz sent a further email about this on 16 October 2006, although there had also been telephone conversations in the meanwhile. He wrote:
“any news on the letter for K? we should target to have something in hand by mid week. Please give us a call in order to discuss status quo.”
459.	The “letter for K” was a letter for Mr Heininger from somebody who would purport to explain the business justification for Mr Heininger’s presence in Dubai, presumably by masquerading as having been a potential investor. Mr Bracy had agreed to use his contacts to find somebody who would be willing to provide such a false explanation. So far, however, his efforts had not been fruitful, as he explained:
“Understand that people are not exactly lining up to commit ... you can fill in the rest. Anyway, I can't make people make such a decision before they are ready. Thus, I understand your time frame desires, but frankly, if and when people step up they will do so when they are ready (people read the news here too). 
We are waiting on 3 people to get back to us. We understand the timeframe, as do they. We are doing the best we can.”
460.	It appears that Mr Blatz was not satisfied with this. Later on 16 October 2006 Mr Bracy sent a further, more emollient, email:
“Keep this 2 yourself before you read. As to my earlier e-mail, I was running to catch a plane so if it came across harsh, it was not intended. I know you guys are under the gun on this one so ed and I are taking it very seriously. As I mentioned we have asked 3 people about it and 2 of them to our surprise were aware of the issue. Thus, it is difficult to say to folks ‘nothing further can possibly happen’.
Instead we have had to focus on ‘even in the unlikely event something does there is no jurisdiction thus no harm to you’. As you can imagine the next question was ‘what's in it 4 me’. 
Anyway, we are working on the same timeframe as you. As a head's up we may have to deal with that second question.”
461.	Thus Mr Bracy was contemplating, indeed suggesting, that if he was to persuade one of his contacts to provide the desired letter exonerating Mr Heininger, he might need to bribe them. He appears to have been quite willing to do so, at any rate if provided by Value Partners with the necessary wherewithal. 
462.	His email went on to discuss arrangements for the proposed safari with Mr Senf and Mr Blatz later in the month, noting that Mr Czekalowski (who was due to attend) might have to cancel, as in the event he did. Mr Bracy observed that this “may turn out better as we can talk more freely”, no doubt about the less savoury aspects of their dealings together.
463.	On 17 October 2006 Mr Maron (the “Ed” referred to in Mr Bracy’s email, by now working with Mr Bracy in UBS’s Municipal Securities Group) reported that he had “spoken with several parties regarding support on the Dubai trip without any success”. However, Mr Bracy did not give up hope of finding a way to help his friends in their hour of need. On 19 October 2006 he sent an email to Mr Blatz explaining that he was “working on the letter with Richard concept”. This “concept” was a letter from Mr Bracy’s multi-talented lawyer friend Richard Isgard (see [208] above) to confirm Mr Heininger’s attendance at a conference in Dubai, and thus to provide a business justification for the trip. It appears that no such letter from Mr Isgard was ever forthcoming, although Value Partners did subsequently obtain a letter dated 2 November 2006 from a different lawyer, David Lieberman of the well known firm of Simpson Thacher & Bartlett LLP in New York, confirming that various meetings were held in their office on dates in November and December 2002. I should make clear that there is no reason to think that the contents of this letter were untrue or that Mr Lieberman (who is a partner in the firm) was aware of the purpose for which it was required. Nor is there any evidence of the use, if any, to which this letter was put. What is odd about it, however, is that a draft of the letter appears to have been provided by Mr Bracy, although he denied this. At all events Mr Blatz thanked him for drafting the letter, to which Mr Bracy responded:
“That’s great, I’m glad it worked out.”
464.	Self evidently, this whole “letter for K” episode was disgraceful. When asked about it, Ms Short said this, with which I agree:
“Q (by Mr Lord): But it's right, isn't it, Ms Short, I'm sure you would agree, that there is something shockingly dishonest in Value Partners feeling able to contact a UBS banker to ask him to fabricate evidence to assist the managing director of a municipal water board?
A. Yes, I think it's appalling.
Q. And it's right, isn't it, that if that was the sort of relationship between Mr Bracy and Value Partners, that Value Partners felt able to make those sort of corrupt proposals to Mr Bracy, that that really calls into question anything that Value Partners and Mr Bracy did in relation to the KWL transaction as well?
A. It has to, yes.”
465.	It is apparent, not only that Mr Bracy’s attempt in evidence to wriggle out of the situation plainly disclosed by the documents was untruthful (see [77] above), but that his relationship with Value Partners was indeed such that Mr Senf and Mr Blatz felt able to reveal their own dishonesty to him, confident that he would not report them, and to ask for his active assistance, equally confident that this would be forthcoming. Their confidence was well founded. The facts that Mr Bracy responded as he did, apparently without surprise or qualms of conscience, and that he was the one who suggested that those he had approached to provide false evidence might need an incentive to co-operate, strongly suggests that so far as he was concerned, and even though he was not aware of the bribe paid to Mr Heininger, the dishonesty of Mr Senf and Mr Blatz was not news. I so find.
466.	Obviously, if he had been an honest man, Mr Bracy would have reported this matter to his superiors and to the compliance officers at UBS. If he had done so, as he knew, UBS would have refused to have anything further to do with Value Partners and the stream of future business on which he had placed his hopes would immediately have dried up. Mr Bracy, however, did not report the matter, precisely in order to protect the relationship with Value Partners and to keep alive the prospect of such future business. This included not only the remaining legs of the transaction with KWL (in the event, concluded with Depfa), but also the potential deals with other Value Partners clients which he had been discussing. Mr Bracy continued to report to his boss the way in which, thanks to his marketing efforts and the efforts of others within UBS, “our working relationship with Value Partners is continuing to expand”.
The safari
467.	Between 27 and 31 October 2006 Mr Bracy and Mr Sanz-Paris accompanied Mr Senf and Mr Blatz on a safari in South Africa paid for by the latter to celebrate the closing of the Balaba transaction. Mr Czekalowski, Mr Heininger and Dr Schirmer had been invited (see [94] above) but in the event did not attend. In Mr Czekalowski’s case, this was for a genuine business reason. In the case of Mr Heininger and Dr Schirmer, it would have been folly to go on such a trip given the highly charged atmosphere prevailing in Leipzig and their fight, still unresolved, to keep their jobs. 
468.	Mr Bracy told UBS (whose compliance department approved the trip) that its purpose was to discuss current and future business, though his evidence was that in the event business was not discussed and nor was the issue of Mr Heininger’s expenses. I find that incredible, in circumstances where Mr Bracy had accepted that Mr Senf and Mr Blatz’s requests for the “letter for K” had been frequent and urgent and the situation was still unresolved. It is impossible to reconcile with the earlier suggestion that the absence of Mr Czekalowski would enable Mr Bracy and Value Partners to “talk more freely” (see [462] above). 
469.	Mr Sanz-Paris too had no recollection, so he said, of business being discussed much on the trip. He accepted that by this time he had known of the allegations against Mr Heininger (indeed it is apparent from an email he sent on 19 October 2006 telling others in UBS that the allegations were “irrelevant” that he had discussed them with Mr Senf), but sought to give the impression that when the group returned to their hotel after each day’s activities, he would escape to his room as quickly as he could. I do not accept that evidence. If Mr Sanz-Paris did not ask about the current status of the allegations against Mr Heininger, allegations about inappropriate hospitality paid for by the very people who were paying for the luxury safari which he was currently enjoying, that can only be because he knew that this was a sensitive subject and positively did not want to know. Otherwise the last minute absence of Mr Heininger from the trip and the potential impact of the allegations on the final KWL transactions which remained to be concluded would have been obvious talking points. Indeed LBBW had just told UBS that because of these allegations it was losing interest in participating in a further transaction (see [479] below).
470.	However, I do not accept, as KWL urges, that Mr Sanz-Paris knew about the “letter for K” episode. Mr Senf and Mr Blatz knew Mr Bracy well, but they did not know Mr Sanz-Paris anything like so well. I think it unlikely that they would knowingly have exposed their dishonesty to him quite so blatantly. Mr Bracy too would have been taking a major and unnecessary risk by telling Mr Sanz-Paris about this incident and I am unable to find that he did so. Thus I conclude that Mr Sanz-Paris did not know about the “letter for K” episode. He did, however, know enough to realise that there was something seriously wrong about Mr Senf and Mr Blatz (see [82] above).
The “transaction overview” document
471.	On 13 November 2006 Mr Blatz sent Mr Sanz-Paris what he described as “just a little reminder”, asking when Mr Sanz-Paris expected to provide “the transaction overview on the KWL document”. This must have been something which Mr Blatz had previously requested, with at least some explanation of what he wanted and for what purpose, either during the safari trip or on the telephone subsequently. Mr Sanz-Paris instructed Mr Mehta to produce a draft, which Mr Mehta did, sending his draft for any comments not only to Mr Sanz-Paris but also to Value Partners, before producing a final version.
472.	The transaction overview document produced by Mr Mehta under Mr Sanz-Paris’s direction was described as providing “a summary of the transaction, rationale and structure”. It stated:
“The objective of these transactions was to 
* Mitigate the single name concentration risk associated with the existing collateral assets (MBIA, ML, GECC, Balaba) 
* Replace this risk with that of a tranche of an actively managed diversified portfolio of assets 
* Structure the transaction without requiring any changes to current lease documentation or removal of the current assets that are pledged 
* Possibly achieve a net upfront cash benefit should market conditions be favourable upon execution.”
473.	The document went on to provide details of the Balaba and LBBW transactions, stating that:
“In both transactions, KWL was able to achieve a net upfront cash benefit, as the premium received for accepting exposure to the CDO tranches was in excess of the cost of purchasing protection on the single name credits.”
474.	At a later stage, explaining the transactions in more detail, the overview continued:
“In return for accepting the risk on the CDO tranche, UBS pays to KWL a CDO premium as cash upfront. This cash payment is then utilised to fund the cost of mitigating the single name credit exposure.”
475.	These passages give the clear impression – and must have been intended to do so – that the purpose of the premium payable to KWL for accepting the risk of the STCDO was to fund the single name CDS protection, and that any net premium payable to KWL over and above this was merely an incidental benefit. This was misleading. Contrary to the suggestion in the fourth bullet point, achievement of a substantial net premium had always been fundamental to the transaction, not a lucky side product arising from favourable market conditions. Moreover, the overview did not say that in the case of one of the two completed transactions the net premium had been US $21.1 million and in the case of the other it had been €6.4 million. It is impossible to conclude that the omission of these figures was other than deliberate.  
476.	Mr Sanz-Paris and Mr Mehta claimed to have no recollection of this document, or of the purpose for which it was requested, evidence which KWL describes as “convenient amnesia”. Certainly the document was too specific to KWL to have been required as some kind of general marketing tool for Value Partners, as was suggested on behalf of UBS. Other documents from this time suggest that KWL’s auditors were about to begin their usual audit process and it may be that it was required as a summary which could be provided to them. Mr Sanz-Paris may not have known the precise purpose for which the document was required, but he must have been instructed (and must in turn have instructed Mr Mehta) that the net premium figures should not be included. UBS would otherwise have had every reason to take credit with KWL for having met its requirement for upfront cash so handsomely. Mr Sanz-Paris knew, therefore, that the overview document was intended to give somebody, either within or connected to KWL, a misleading impression. That remains the case even if the person intended to be misled had other means of finding out the truth, for example by calling for the transaction documents.
477.	What actually happened to this document is not in evidence. It may be that proper disclosure from KWL would have revealed its purpose, or who knew that it was being prepared. Mr Lord told me on instructions that in the event the document was sent to Value Partners but in the end was not passed on to KWL. It is therefore something of a mystery, but it remains a document which Value Partners wanted and which Mr Sanz-Paris was willing to provide, knowing it to be a very misleading summary of the transaction.
LBBW drops out
478.	Following the closing of the LBBW transaction restructuring the GECC note, discussions continued with LBBW regarding the intermediation of further transactions regarding the remaining two existing bonds (Merrill Lynch and MBIA). For that purpose LBBW’s Leipzig branch held a due diligence meeting with Mr Heininger on 2 October 2006, for part of which Mr Sanz-Paris was present. In what Mr Sanz-Paris described as “a true grilling”, LBBW asked Mr Heininger whether he understood the impact of potential defaults and the risk that KWL might suffer significant losses, to which Mr Heininger responded that he did.
479.	However, the publicity caused by the expenses scandal caused LBBW to reconsider its relationship with KWL. There were different views about this within LBBW. Some people were very concerned about being associated with the negative publicity, while others discounted it on the basis that the Leipzig press was very aggressive and there was probably no substance in the allegations. In the end the former view prevailed, although it is also fair to say that market movements meant that a further transaction in the latter part of 2006 would have been less profitable anyway, so that the fee available to LBBW on an AAA rated STCDO would have been minimal. On 25 October 2006 LBBW told UBS that a further transaction could cause it problems internally due to the “noise around KWL … with respect to the management of the company.” It finally pulled out of any further transaction on 7 January 2007.
Discussions with Depfa
480.	By this time it was already apparent that LBBW was losing interest and UBS had begun work on identifying an alternative intermediary. Depfa was first introduced as a potential intermediary at the end of November 2006. The approach to Depfa was made via Tarek Selim, who worked in UBS’s Structured Product Sales department in Germany. He remained the primary point of contact with Depfa during the negotiations, with most communications from UBS being routed through him, although his role was limited to the passing on of messages. Mr Selim’s main contact at Depfa was Ravi Gidoomal.
481.	As with LBBW, UBS presented the transaction to Depfa as an “intermediation trade” in which the “CDO tranche risk is transferred back to UBS via a single back to back swap”, with UBS being appointed as “Calculation Agent” under both the Front and Back Swaps (cf. [409] above). Also as had happened with LBBW, almost all the negotiations took place between UBS and Depfa, with very little involvement of KWL. On 5 December 2006, Mr Selim sent Mr Gidoomal a set of draft transaction documents prepared by Mr Lancaster, and an initial conference call to discuss the trade was arranged for the following day. Later on 6 December 2006 Mr Gidoomal sent an email to his superior setting out a brief explanation of the proposed transaction, noting that “UBS have no more credit line available to KWL so looking for a counterparty to intermediate trade” via a back-to-back swap, with Depfa being paid “$1-1.5m upfront as an intermediation fee”. His email reported also that “KWL have board approval for trade so keen to execute in Q1”. These statements must represent what he had been told by UBS as the reason why UBS wanted to involve Depfa in the transaction. It was of course not correct that the KWL board had approved the trade, at any rate if that was a reference to the Supervisory Board.
482.	Depfa was keen to expand into this kind of transaction with public sector entities and was therefore interested in this opportunity. It saw the main risks to itself from the transaction as being the KWL credit risk and reputational risk, although it regarded the latter as mitigated by the fact that this proposed transaction was part of a series executed by UBS to restructure KWL’s existing credit portfolio.
483.	Mr Gidoomal submitted an internal credit application for the trade on 4 January 2007. It stated (wrongly) that UBS was acting as a financial adviser to KWL. Probably this was a conclusion which those involved at Depfa reached for themselves, rather than anything said by UBS. In any event, UBS subsequently made clear that this was not correct.
484.	On 16 January and again on 18 January 2007 Depfa requested from UBS a copy of the KWL board approval to which UBS had referred. Mr Lancaster responded by sending a copy of the KWL Supervisory Board minute of 7 September 2006 (see [442] above). That did not constitute express approval of anything as the Supervisory Board had merely “taken note” of what Mr Heininger had said. The minute did not even make clear on its face to what it was referring.
485.	By 1 February 2007 Mr Gidoomal had reviewed the documents which UBS had provided, but raised a concern with UBS about the reputational risk which Depfa would be taking. He wrote:
“I hope to have reviewed legal documents with our lawyers, also for early next week - one issue that I am not sure if we resolved was that of an indemnity from UBS (or KWL) that Depfa has not provided advice and will not be on the hook in the future - am thinking particularly of reputation risk.”
486.	Mr Sanz-Paris reacted strongly against the idea that Depfa should not take any reputational risk in the event that it proved necessary to enforce the STCDO against KWL, commenting to Mr Selim in an internal email that: 
“we have been quite clear from the beginning … they are on the reputational hook for good or there is no deal. The only concession we made is that if we are not facing the client on our swap, we will get them out of theirs, so they are not on their own.”
487.	This was a reference to a point eventually covered in a separate deed entered into between UBS and Depfa on 28 March 2007 dealing with a point raised by Depfa which was concerned about what would happen if the Balaba transaction between UBS and KWL were to fall away for any reason. Depfa was concerned to ensure that if it proved necessary to enforce KWL’s obligations, it would be doing so together with UBS and not on its own.
488.	At this stage UBS sent Depfa a copy of the risk disclosure letter which KWL had signed for the Balaba transaction. This was sent as a way of addressing the concerns which Mr Gidoomal had raised in his email of 1 February 2007. It indicated that UBS was not providing advice to KWL. The question of UBS’s role was raised directly on 7 February 2007, when Mr Gidoomal asked what was the relationship between UBS and KWL. Mr Sanz-Paris’s response was that: 
“UBS is arranger of the transaction for KWL. This means that we finalised the structure following KWL criteria and objectives, and coordinate discussions with the rating agencies.
UBS is not an advisor to KWL. Value Partners AG (a Swiss company specialised in Lease transactions) did the study on the transaction and was hired by KWL to do the transaction. They were the main point of contact for us, as they represented the client. Value Partners advised KWL with regard to the structure of the transaction and will advise them on the levels and when to execute the further transaction. 
KWL is a swap counterparty and so we consider them a client, and we had done our own due diligence on the trade and the client. Given that Depfa will be facing KWL on the swap, you must do the same. We are not advising you or KWL in respect of this transaction.”
489.	This made it clear that UBS was not providing financial or any other advice to KWL about the proposed transaction, and that such advice was being provided to KWL by Value Partners. It is therefore surprising that Mr Gidoomal did not explain this to Depfa’s credit committee, or correct the credit application which stated that UBS was acting as financial adviser to KWL. (The application stated also that KWL had board approval for the transaction notwithstanding that the minute which Mr Lancaster had provided fell short of demonstrating this: see [484] above). Ms Flannery, who chaired Depfa’s credit committee and was in general an impressive and straightforward witness, agreed that Mr Gidoomal should have reported this. However, I find it difficult to accept her evidence that it would have made no difference if he had: she said that even if told that UBS had said in terms that it was not advising KWL, she would still have taken the view that it was and would have taken comfort from this. 
490.	On 8 February 2007 Depfa’s credit committee approved the transaction. Depfa informed UBS of this, adding that this left only “legal sign-off (and what we need re: risk disclosure)” to be confirmed. In the event, however, it was to be several more weeks before the transaction was concluded.
491.	On 13 February 2007 Mr Gidoomal reported to UBS the outcome of an internal Depfa discussion on some of the outstanding issues:
“I am awaiting comments on docs from my lawyers, but we had our internal discussion on reputation risk / KWL capacity, and I wanted to come back to you with feedback: 
1) We would need to have an ISDA with KWL - has this already been contemplated? Typically a law firm would provide an opinion on KWL's capacity to enter into the ISDA, and we would assume this to be at KWL's expense. 
2) Assuming the law opinion in (1), this should provide us with sufficient comfort on KWL's capacity to enter into credit derivatives (in addition to our own internal due diligence). …
3) We would like to have a follow up call with our lawyers on the line to confirm the approval processes that UBS have been through. We want to ensure that the role of Depfa as an intermediary has been clearly communicated, and would be interested to understand how this improves the materiality concerns (given that we are neither providing advice or taking outright CDO risk in this trade). 
4) Can you send us the articles of association of KWL?”
492.	Thus Depfa contemplated that in addition to whatever due diligence it carried out for itself, it would obtain a legal opinion from an external law firm dealing with KWL’s capacity to enter into derivative transactions which, if suitably positive, would provide Depfa with “comfort on KWL’s capacity”. That might suggest that Depfa saw itself as taking the risk that KWL did not have such capacity. On the other hand, Depfa stated also that it was not “taking outright CDO risk in this trade”, a statement which UBS never corrected and which would be wrong if it turned out that KWL did not have capacity to enter into the STCDO: in that event, Depfa would be taking the “CDO risk” as it would be liable to UBS in the event of sufficient defaults to reach the attachment point of the tranche.  
493.	Depfa wanted also to understand, and presumably to rely on, UBS’s own due diligence process. This latter point was unacceptable to UBS, Mr Sanz-Paris regarded it as “a deal killer”. On 14 February 2007 UBS replied:
“As to 3, not sure where you are going here. Depfa cannot rely on UBS’s approvals. Depfa must assess its own suitability and capacity concerns and obtain such comfort as it sees fit.”
494.	On 16 February 2007 UBS provided Depfa with a copy of the capacity opinion provided by Freshfields to UBS in respect of the Balaba STCDO and provided answers (drafted by Mr Sanz-Paris) to some questions which Mr Geoghegan had posed. The first such question was why UBS needed Depfa to intermediate at all, to which UBS explained that it needed an intermediary due to its credit policy, and that even if it hedged the transaction, that did not release UBS’s credit line. It added that it had been a key point for UBS on the Balaba transaction to ensure that KWL understood the transaction and that the transaction was suitable for KWL, and that KWL had signed a risk disclosure letter for UBS and would also sign one with Depfa.
495.	However, Depfa was not satisfied with this. After studying the Freshfields opinion it expressed concern on 20 February 2007 that in the light of the discussion in the opinion about the Naumberg court decision (see [353] above) further due diligence might be required in relation to the issue of mis-selling and proposed that the best solution would be for UBS to provide an indemnity. It explained that Depfa was:
“happy to take the credit risk of KWL, but not other risks over which we have no control (mis-selling etc).” 
496.	It is apparent, therefore, that by this stage there was no express agreement as to where, as between UBS and Depfa, the risk would lie that KWL did not have capacity to enter into the proposed STCDO. It is apparent also that Depfa was drawing a distinction between the “credit risk” of KWL which it was prepared to take and “other risks” which it was not. There was no response to this point from UBS. However, the point of potential concern on which Depfa was focusing was that it might be held responsible for mis-selling. At this stage it had nothing to do with the question whether the approval of KWL’s Supervisory Board was needed, possibly because Depfa was still under the misapprehension that such approval had been given (see [489] above). 
497.	Mr Gidoomal’s thinking at this stage is summed up in an email to his superior Mr Andrew Readinger dated 22 February 2007. In essence, he thought that there were risks in going ahead with the transaction, but that these were worth taking:
“Final remaining concern is legal/reputational risk. KWL is public sector owned utility company and therefore CDOs somewhat outside of usual line of business. We have a weak legal opinion, KWL board approval, we can meet CFO ahead of trading, and in addition KWL will sign a risk disclosure letter (non-reliance, own advice sought etc). 
Clearly there is still a risk that if portfolio defaults and KWL decide to play the role of ‘stupid’ investor they can refuse to pay and we would have a legal problem. (German court ruled in favour of a muni in an fx deal in 2005). Against that we have transaction documentation, risk disclosure letter signed by KWL, and the portfolio is Aa3 rated corporate CDO so still fairly strong credit quality. 
What are your thoughts? David is concerned with the risk of the CDO defaulting and having to take KWL to court to be paid - perhaps I am being naive but I think this is a hypothetical risk that we should be willing to take. The deal offers good economics and such risks are always going to be more prevalent when dealing with public sector clients.”
498.	However, while Mr Readinger agreed that the risk was remote, he replied that he would rely on the view of Depfa’s legal department. 
499.	On 27 February 2007 Mr Lancaster responded to Depfa regarding the Naumberg mis-selling case and what UBS had done to ensure that this point did not arise in relation to the Balaba transaction, adding:
“Clearly this is something you need to satisfy yourself.”
500.	The Depfa lawyer responsible for this transaction was Mr Burkhard Wiehler (see [109] above). On 2 March 2007 he sought clarification of some aspects of the Freshfields opinion provided to UBS, asking that the Supervisory Board minute approving the transaction (which at that stage he understood to exist) should be included in the list of documents reviewed by Freshfields. He requested also confirmation that the Supervisory Board decision was sufficient. Mr Lancaster (who was at this point under the impression that such approval existed) suggested that he should speak directly to Freshfields, adding that if Depfa’s legal department was not happy with the transaction, this was something which UBS needed to know. Mr Wiehler therefore wrote to Freshfields asking them to provide an opinion similar to the one provided to UBS, but including reference to the Supervisory Board minute approving the transaction. He sought in addition clarification of two further points:
“3. Clarification that in light of § 96 3 (b) of the Gemeindeordnung Sachsen ("Rechtsgeschaefte von erheblicher wirtschaftlicher Bedeutung") a decision by a supervisory board is sufficient.
4. Clarification if the acceptance of the deal by a sub-committee of the supervisory board is sufficient or if we need the board's or even the shareholders' approval.”
501.	The provision referred to in Mr Wiehler’s paragraph 3 was legislation concerned with a “legal transaction of considerable economic significance”. His paragraph 4 arose because he had noticed from the minutes provided by Mr Lancaster that KWL’s Finance Committee had taken note of Mr Heininger’s presentation with approval (see [443] above). Mr Wiehler did not at this stage focus on whether the Freshfields capacity opinion provided to UBS contained advice that Supervisory Board approval was unnecessary. He was still under the impression that such approval had been given and was concerned to establish that it was sufficient.  
502.	Mr Lancaster, however, having been in contact with Value Partners, had now realised that no such prior approval had been given. He commented to Freshfields that they should say in their opinion that such approval was not required and should explain why it was not. He assumed that this would not be a problem and wrote to Mr Gidoomal to explain that:
“Freshfields should be able to send you a revised legal opinion shortly. Will add some additional language re public policy. However, supervisory board approval is NOT required. They will deal with this.”
503.	This was a change of position by UBS. Previously UBS had said that Supervisory Board approval existed. Now it was saying that there was no such approval, but that approval was not needed, and that Freshfields would deal with this point in their opinion. Freshfields, however, were reluctant to do so. On 5 March 2007 they told Mr Wiehler that both “the client” (a reference to KWL) and they themselves did not want to change an opinion which had been accepted twice in the past – that is to say, by both UBS and LBBW. This was, perhaps, understandable. If Freshfields were to produce opinions in different terms in relation to transactions which were substantially the same, that could lead to some difficult questions. 
504.	In response Mr Wiehler pointed out that the opinion did not answer the points in his email set out at [500] above and asked Freshfields to do so or to explain the position in an email. Mr Lancaster was concerned that this was a sticking point for Depfa and requested Value Partners to press Freshfields to include a sentence in the opinion to the effect that KWL’s Supervisory Board approval was not legally required. 
505.	This led to an important telephone conversation between Mr Wiehler and Dr Reichert-Facilides of Freshfields. Dr Reichert-Facilides made a contemporary report of the conversation in an email to Mr Blatz and others: 
“Have just spoken with Wiehler and agreed with him that the requirement of a Supervisory Board resolution is not an issue for the LO [legal opinion] but a question of Depfa's business policy, but that there will be no resolution in view of the practice [used] so far. Mr Wiehler will discuss this internally.”
506.	Mr Blatz forward this to UBS, adding his own report that: 
“Daniel has spoken to the Depfa-guy. (See below e-mail). He explained to him on which basis the first two tranches were done (Management decision and after closing notification to the supervisory board). Wiehler will discuss internally whether this approach is acceptable to Depfa.”
507.	It is clear, therefore, that Dr Reichert-Facilides reiterated to Mr Wiehler that there would be no Supervisory Board approval of the transaction and that Depfa would have to decide on that basis whether to go ahead. However, there is an issue as to what Dr Reichert-Facilides meant in his email by saying that a Supervisory Board resolution was “not an issue for the LO but a question of Depfa's business policy” (and therefore what he had said to Mr Wiehler about this). KWL’s case is that what Dr Reichert-Facilides said was that the question whether Supervisory Board approval was required would not be dealt with in the legal opinion and that Depfa would have to make a commercial judgment about this. Superficially, that is one possible interpretation of the brief wording of Dr Reichert-Facilides’ note, but it does not make sense. The question whether Supervisory Board approval was required was plainly a legal, not a commercial, question. It is hard to see how Dr Reichert-Facilides could have told Depfa that it would have to make a commercial judgment about what was obviously a legal question. If Dr Reichert-Facilides had told Mr Wiehler that Freshfields were not prepared to opine on this question and that Depfa would have to make a commercial judgment whether to go ahead with the transaction with no comfort from Freshfields on a basic question which might mean that the whole transaction was invalid, Mr Wiehler would undoubtedly have reported that and sought guidance from his superiors in Depfa, for example by bringing the point to the attention of the credit committee. But he did not. In fact he appears not to have followed up on this conversation within Depfa at all, whatever it was that he had agreed to discuss internally.
508.	There was no evidence from Dr Reichert-Facilides to support KWL’s interpretation of the note. KWL suggests that it was for Depfa to call him, although it is plain that Freshfields regarded KWL as their client. The fact is, however, that for whatever reason nobody called him as a witness and there is therefore no evidential support for KWL’s interpretation of his note. 
509.	Mr Wiehler himself had no recollection of the conversation, although he agreed that it had taken place. Having seen Dr Reichert-Facilides’ note, he thought that the effect of the call must have been to reassure him that, as a third party, Depfa did not need to concern itself with whether a board resolution was required by KWL’s Articles and, more generally, did not need to check whether KWL had followed its own internal decision making procedures in entering into the transactions. Care is needed in assessing evidence of that nature when a witness has no actual recollection of the conversation. However, I accept this as the most probable interpretation of Dr Reichert-Facilides’ note in the circumstances, and therefore of what was said in the telephone conversation. I find that the effect of this part of the conversation was that Dr Reichert-Facilides told Mr Wiehler that the reason why the requirement for a Supervisory Board resolution (i.e. the question whether such a resolution was required) was not a matter for the Freshfields legal opinion was because the existence or absence of such a resolution did not impact on the validity of the transaction. What he conveyed by saying that it was a question of Depfa’s business policy was that whether Depfa was prepared to proceed on the basis of post-closing notification only was a business decision for Depfa. For example, for reputational reasons, Depfa might prefer the transaction to be notified to the Supervisory Board in advance and might not be willing to proceed if this was not done. But this did not affect the legality of the transaction.
510.	This makes sense of such limited records of the conversation as there are and accords with the inherent likelihood of the situation. It explains also the fact that Mr Gidoomal was able to tell Mr Lancaster on the same day that “regarding capacity etc, I think we are more comfortable than our last call”, a comment which would be strange if KWL’s interpretation of Dr Reichert-Facilides’ note were correct. 
511.	By this stage the wording of the opinion which Freshfields would provide was almost final. There was one last point, which was that in the telephone conversation of 6 March 2007 Dr Reichert-Facilides had agreed to remove paragraph 2(h) which read as follows:
“we have with your consent and without any further enquiry assumed ... that the validity of the Documents is not affected by any violation of procedural or substantive requirements which is not evident from the face of the Documents.”
512.	Mr Wiehler reiterated his request for this paragraph to be removed in an email of 12 March 2007. He understood that this was agreed. However, he made two mistakes. The first was that although the wording was now agreed, he forgot to obtain a final signed version of the Freshfields opinion. He only realised this much later, in December 2008, when he needed to provide the opinion to Depfa’s auditors. At that point Freshfields did provide a signed opinion, addressed to Depfa, in the terms which had been agreed. They agreed also to backdate the opinion to 28 March 2007 in order to save Mr Wiehler from the embarrassment of having to admit his mistake, although it is fair to say that the opinion did contain the terms which had been agreed as at that date. 
513.	Mr Wiehler’s second mistake was that despite several requests, he never obtained a copy of KWL’s Articles of Association (although he did receive a copy of KWL’s entry on the commercial register). Indeed, on 12 March 2007 Freshfields told Mr Wiehler that they themselves were not sure whether they had the most up to date version of those Articles and would send a copy once they had obtained them from KWL. However, they never did.  
514.	By this stage Depfa was almost ready to proceed. It obtained its own risk disclosure letter countersigned by Mr Heininger and Dr Schirmer confirming that KWL understood and accepted the risks of the Depfa transaction. It requested also a direct telephone call with KWL. This call took place on 13 March 2007 and was attended by Mr Heininger, Mr Senf and Mr Blatz for KWL/Value Partners; Mr Gidoomal, Mr Geoghegan, Mr Wiehler and Mr Mike Richter for Depfa; and Mr Sanz-Paris and Mr Lancaster for UBS. As Mr Gidoomal explained, one purpose of the call was to walk Mr Heininger through the risk disclosure letter to be signed with Depfa. Mr Heininger confirmed that he understood that KWL bore significant risks and stood to lose up to the total of the notional amount. Depfa’s role as an intermediary was described. Mr Heininger confirmed that the transaction had been proposed to KWL by Value Partners, who had discussed with and advised KWL about the risks of the transaction. KWL describes this call as a box ticking exercise. That may be so, but the fact is that the boxes were ticked.
515.	Shortly after the call with KWL, Depfa confirmed that it had received approval for the transactions, and trading was scheduled for Monday 19 March 2007. Since the transaction documentation had not been signed, Mr Heininger confirmed his assent by email. Following the auction, Mr Sanz-Paris confirmed to Mr Blatz that the net premium for the Depfa transaction was US $7 million. Depfa received an intermediation fee of €1.3 million, with the attachment and detachment points for the tranche being 4.2% and 5.7% respectively.
516.	Execution of the contractual documentation for the Depfa transaction took place subsequently, on 28 March 2007. The same day, Moody’s issued a letter confirming that the Depfa STCDOs had been assigned a rating of Aa3.
The Value Partners Introducing Agreement
517.	Meanwhile, in November 2006, Value Partners indicated that it was arranging meetings with potential clients in Argentina and asked if Mr Sanz-Paris could attend. In fact the trip went ahead in December 2006 with Mr Czekalowski. In the course of this trip, Value Partners and UBS identified an opportunity for an asset management deal involving Argentinian farmland. In addition, UBS was discussing various other possible transactions with Value Partners during the period the Depfa transactions were being negotiated (albeit none of them came to fruition). These discussions did not involve Mr Bracy. Despite their protestations of loyalty and friendship towards him, Messrs Senf and Blatz were quite happy to drop him when he was no longer useful to them, while Mr Czekalowski was also keen to cut him out of any share in the remuneration for future deals. 
518.	UBS agreed that it would compensate Value Partners directly for its role in sourcing the Argentine farmland transaction. A draft Introducing Agreement was therefore drawn up under which Value Partners would act as an adviser to UBS for the purpose of introducing contacts and business opportunities and would be rewarded with a monthly payment and additional amounts to be agreed on the closing of any transactions resulting from such introductions. As initially drafted, the Introducing Agreement recited that UBS AG and Value Partners had: 
“agreed to cooperate in the procurement of business opportunities (including, but not limited to, business opportunities in respect of farmland or other real estate management transactions, structured credit and/or interest rate transactions and restructuring lease defeasance asset transactions or other transactions as may be agreed from time to time”. 
519.	However, the reference to “restructuring lease defeasance assets” was later deleted because of the risk of a conflict of interest in relation to existing clients. The final version, dated 5 March 2007 (though possibly not signed until later) applied to farmland and real estate management transactions, together with other transactions as might be agreed. In the event, however, apart from the Argentine farmland transaction itself, UBS did no further business with or through Value Partners.  Both parties rely to some extent on this Introducing Agreement. UBS emphasises the respects in which this agreement was different from what had happened in relation to KWL, the fact that references to lease restructuring had been removed, and the fact that it came later in time, before the Depfa transactions were concluded but after the structure of the KWL deals had been fixed. KWL points out that despite the removal of the express wording (which it regards as merely cosmetic) the agreement was capable of being applied to lease restructurings and that it represented something similar to the arrangement for Value Partners to be paid a fee for introducing clients which had been rejected as involving an appearance of impropriety as long ago as April 2006. However, the terms of the Introducing Agreement were never applied to any of the KWL transactions and in the event I have been able to make findings as to the nature of the arrangement between Mr Bracy and Value Partners which did apply at the time of the KWL transactions. That being so, the Introducing Agreement has, in my view, very limited relevance to the issues in this case.
The collapse in the financial markets in 2008
520.	UBS GAM’s management of the portfolios leading up to and following the global financial crisis is addressed below. As is well known, there was a downturn in the US housing market from about mid 2006 which got steadily worse, exposing lenders in the “subprime” market to the risk of losses. By about mid 2007 a global liquidity crisis (the “credit crunch”) was beginning to take hold. Eventually the collapse of Lehman Brothers in September 2008 precipitated an unprecedented upheaval in the global financial markets. Less than a fortnight later, on 26 September 2008, Washington Mutual filed for bankruptcy. Between 7 and 9 October 2008 the Icelandic government nationalised large parts of the national banking sector. This turmoil in the markets led directly to the first Credit Events in the Reference Portfolios. The risk that further defaults would reach the attachment point of the KWL tranches was apparent. The STCDOs were, as one UBS CRC man put it to Mr Linfoot in October 2008, “looking like one sick puppy”.
The termination of the Balaba Single Name CDS
521.	In September 2008 KWL terminated the Balaba Single Name CDS. On the termination of this CDS, since the mark-to-market position was in KWL’s favour, UBS paid KWL a total of £3.3 million.
Potential restructuring 
522.	In early 2009 Mr Heininger, together with Value Partners, suggested that the GECC and Merrill Lynch Single Name CDSs be unwound and the proceeds applied to purchase additional subordination in the STCDOs. UBS began negotiations with Value Partners acting on behalf of KWL, and initial internal approval for a restructuring was given by UBS’s Control Functions division subject to certain conditions. The conditions included, among other things, a further opinion from Freshfields and a copy of KWL’s Supervisory Board approval for the restructuring. However, although it was discussed from time to time during 2009, this proposed restructuring did not proceed. This remained the position in early 2010 when Mr Heininger was finally arrested. 
Defaults to the Reference Portfolios and the termination of the STCDOs
523.	As the fallout from the financial crisis continued further defaults occurred. On 1 December 2009 the default of Financial Guaranty Insurance Company breached the attachment points in the Balaba STCDO and the Depfa STCDOs. On 3 December 2009 UBS wrote to KWL alerting it to the likelihood of substantial sums falling due under the Balaba STCDO in the near future and seeking reassurance about the steps which KWL would take to ensure that it was in a position to meet its payment obligations. KWL did not respond.
524.	Litigation followed. On 18 January 2010 UBS and UBS GAM issued proceedings against KWL in this court (2010 Folio 50) while on 26 February 2010 KWL commenced proceedings against UBS in Germany seeking a declaration that the Balaba STCDO was null and void. The claim was shortly afterwards broadened to claim a declaration that UBS was not entitled to any payments under the Balaba STCDO. This was followed by a claim against LBBW and Depfa.
525.	On 15 March 2010 UBS (in its role as Calculation Agent) informed Depfa and  KWL that a Cash Settlement Amount of US $32,606,699.31 was payable by KWL and Depfa respectively under the Depfa transactions and four days later Depfa paid this amount to UBS under the Depfa Back Swaps. The payment was made without any reservation.
526.	On 25 March 2010 Ambac Assurance Corporation defaulted. This resulted in the extinction of KWL's tranche in the Balaba STCDO, which caused the Balaba STCDO to terminate automatically on 22 July 2010.
527.	On 14 and 15 April 2010 Depfa wrote to KWL and UBS designating 16 April 2010 as the Early Termination Date under the Depfa Front and Back Swaps, while on 25 June 2010 LBBW wrote to KWL and UBS designating 25 June 2010 as the Early Termination Date under the LBBW Front and Back Swaps. It is common ground that, if the Depfa and LBBW STCDOs were valid and binding, they were terminated by Early Termination on these dates.
528.	That left the outstanding single name CDSs. On 18 October 2010 UBS wrote to KWL designating an Early Termination Date as a result of what it said was KWL’s failure to meet its obligations under the STCDOs. UBS calculated a termination amount payable to KWL of US $66,916,676, which it said that it would set off against what was payable by KWL under the Balaba STCDO.
ABUSE OF THE POWER OF REPRESENTATION
529.	The first ground upon which KWL seeks to resist liability for the net sum due under the Balaba STCDO is that KWL’s two managing directors Mr Heininger and Dr Schirmer were acting outside their authority in signing it without the prior approval of KWL’s Supervisory Board and/or shareholders’ assembly, one or both of which was required by KWL’s constitutional documents, with the consequence that the STCDO was null and void. It is common ground that it makes no difference in the present case whether this issue is regarded as an issue of capacity, giving that term the “broad internationalist interpretation” required by Haugesund Kommune v Depfa ACS Bank [2010] EWCA Civ 579, [2012] QB 549, or of authority. In either event the issues which arise, which are issues governed by German law, are the same. I shall therefore refer to the question of KWL’s capacity without distinguishing between concepts of capacity and authority.
530.	Although KWL relies on the absence of prior approval of the transaction by its shareholder assembly as well as its Supervisory Board, the parties’ submissions focused on the question of Supervisory Board approval. KWL acknowledges that the question whether shareholders’ assembly approval was required is unlikely to add anything of substance to the issues concerning the Supervisory Board. 
KWL’s constitution
531.	KWL is a German limited liability company (Gesellschaft mit beschränkter Haftung) governed by the Limited Liability Company Act. Under Article 5 of its Articles of Association, its corporate bodies are (a) the management (b) the Supervisory Board and (c) the shareholders assembly.
532.	KWL’s Management Board consisted of its two managing directors. They had executive authority and ran the company.
533.	The role of the Supervisory Board was an oversight function, not to run the company. The Supervisory Board’s duty was to monitor the managing directors’ compliance with KWL’s Articles of Association, management rules of procedure, service contracts and the decisions of the company’s corporate bodies. The Supervisory Board was not like the board of directors of an English limited company. It had 21 members. The managing directors were not members. The Supervisory Board had employee and political appointments, most of them with no business experience. It could not tell employees what to do or compel the management to act in a particular way. It could not stop the managing directors doing something within their power under the Articles. Subject to the limits imposed by KWL’s Articles, the managing directors had full power to run the company, including entering into contracts. Contracts would only be taken to the Supervisory Board if they required specific authorisation. That was very rare. Mr Müller could not recall any contracts being submitted to the Supervisory Board for approval during his membership of it. The Chairman of the Supervisory Board could sign contracts with the managing directors, but otherwise the members of the Supervisory Board had no signatory powers.
German law
534.	Evidence of German law was adduced by UBS from Professor Dr Siegfried Elsing of the Heinrich-Heine University of Düsseldorf, by KWL from Professor Dr Lars Klöhn of Ludwig Maximilian University Munich and by Depfa from Professor Dr Klaus Gärditz of the University of Bonn. The experts were able to agree the relevant legal principles and it was therefore unnecessary for them to be called to give oral evidence. Those principles are as follows.
535.	Under German law a company is represented by its managing directors. There is a clear distinction between what is called (in translation) the managing directors’ “authority of representation” and their “power of representation”. The former is concerned with the extent of the directors’ authority as a matter of the internal organisation of the company. That authority may be limited, for example by the company’s constitution or by the directors’ contracts of employment. A director who exceeds his authority will be in breach of his duties owed to the company.
536.	The power of representation, in contrast, is concerned with the directors’ power to bind the company vis-à-vis third parties. As a matter of German law, the “power of representation” is unlimited, so that any limitation on the directors’ authority to bind the company contained in the company’s constitution or elsewhere does not (subject only to an exception for fraud or gross negligence) affect the rights of third parties. As the experts put it:
“The managing directors' power of representation is, as a general rule, unlimited by law and may not be limited either by the company's articles of association, a shareholders' resolution, or in the managing directors' employment contracts or in any other way, § 37(2) Limited Liability Company Act.”
537.	However, the position is different if the third party with whom the managing director dealt either knew or ought to have known (the test here being one of “gross negligence”) that the managing director was acting outside his authority. This is regarded as an aspect of the doctrine of abuse of power:
“The abuse of power doctrine (Missbrauch der Vertretungsmacht), which is rooted in the general private law principle of good faith (§ 242 German Civil Code, BGB) and which also applies to companies, is an exception to the general rule of § 37(2) Limited Liability Company Act that limitations of the authority of representation have no bearing on the power of representation. It states that a person may not rely on the unlimited power of representation if that person knows of the limited authority of representation or could not have failed to realise that such limits exist.”
538.	The experts went on to explain this exception as follows:
“The abuse of power doctrine has two requirements: 
a) The agent must have acted beyond his or her internal restrictions, i.e. acted without authority of representation. 
b) The person contracting with the company must have known or could not have failed to realise that the agent acted without authority of representation.”
539.	The first question, therefore, is whether Mr Heininger and Dr Schirmer were in fact acting beyond their authority. That depends on whether the effect of KWL’s Articles of Association was that prior Supervisory Board approval of the transaction was required. If such approval was required, it is not suggested that UBS had actual knowledge of this. What KWL does suggest is that UBS “could not have failed to realise” that the managing directors were exceeding their authority in this respect. The experts elaborated this concept further as follows:
“The experts agree that the abuse of power doctrine does not only apply when the party contracting with the principal knows that the agent acted without authority of representation but also when this party could not have failed to realize that such restrictions existed. …
The experts agree that a person cannot fail to realise that the agent is acting without authority of representation when due to massive/solid suspicious objective facts ("aufgrund massiver Verdachtsmomente") the existence of such restrictions was obvious ("evident") to the contracting party. Another way of stating the same requirement is that the violation of internal restrictions must have imposed itself ("sich aufdrangen") on the person contracting with the company. In other words, the test to be applied is that of gross negligence (grobe Fohrlässigkeit), i.e. the person contracting with the company must have failed to see what was plain for everyone to see if put into the shoes of the contracting party. Thus, while there is no general duty to inquire into the internal affairs of the company, the aforementioned conditions can be met when the need for an inquiry as to whether internal restrictions existed imposed itself on the contracting party due to massive/solid suspicious objective facts in the particular case.”
540.	There was disagreement whether the German word “massiver” was better translated as “massive” or “solid”, but I doubt whether it makes any difference. The overall concept is clear. UBS submits that the concept involves an element of “blind eye” knowledge and cites one case which speaks of the counterparty having “with gross negligence turned a blind eye to the abuse of power of representation”. If that is meant to require a deliberate shutting of a counterparty’s eyes to the obvious, I consider in the light of the evidence as a whole that it puts the test slightly too high. 
541.	Nevertheless it is apparent that the test, whether described in terms of “gross negligence”, “could not have failed to realise”, “obvious/evident”, “failed to see what was plain for everyone to see”, or “massive/solid suspicious objective facts”, requires an extremely high degree of negligence on the part of the counterparty, who is under no duty to make inquiries. Even if the counterparty is aware of the possibility that Supervisory Board approval may be required and fails to investigate, that will not of itself amount to gross negligence. It will only do so if there exist massive or solid objective facts which cry out for investigation. Mere ambiguity or doubt about the managing director’s authority or a risk that he does not have authority will not satisfy the test of evident abuse. The test is satisfied only where the abuse is obvious.
542.	Founding itself on the words “the violation of internal restrictions must have imposed itself on the person contracting with the company” KWL submits that if the counterparty embarks upon an investigation of whether Supervisory Board approval is required, it would be grossly negligent if that question is not then pursued to a fully satisfactory conclusion. However, that “I’ve started so I have to finish” approach does not in my judgment fairly reflect the experts’ evidence viewed as a whole. That evidence is rather to the effect that there is no duty to make inquiries about internal restrictions on the authority of the managing directors in the absence of massive or solid objective facts which cry out for investigation. If that is the position, the extent of any inquiries which are then required to be made must depend on all the circumstances of the case, including whatever information is then obtained, which may have the effect of assuaging the counterparty’s initial suspicions so as to render further inquiry unnecessary. 
543.	Accordingly, while there would be some attraction in the simplicity of an approach which insisted that once the question of the need for Supervisory Board approval was raised, UBS should have insisted either that it be obtained or that a legal opinion be obtained stating in terms that it was not required, that does not in my judgment represent German law.
544.	A helpful illustration of the approach of the German courts appears from the judgment of the Leipzig Regional Court in the litigation concerning the LBBW Front Swap in this case, although it must be borne in mind that the question considered there was whether LBBW (not UBS) was grossly negligent. The court said (omitting citations of numerous other cases where the same approach has been applied):
“The Defendant [LBBW] also had no duty to enquire whether or not any possible approvals had been granted … and to have these approvals, if any, submitted to it before the conclusion of the CDO transaction. [LBBW] neither had any positive knowledge of an abuse of the power of representation, nor must it have imposed itself [on LBBW] that the representative was using his power of representation in an obviously suspicious manner … As described above, the abuse of the power of representation is obvious only in circumstances of massive/solid suspicious objective facts, as opposed to merely suspicious objective facts … Matters can be deemed objectively obvious only when, according to the circumstances given, an inquiry with the principal being represented imposed itself on the contracting party … In this regard, an objective breach of duty is necessary, which is clearly and obviously recognisable to everyone ... A merely negligent lack of knowledge is not sufficient, as the legal regulation of Section 37 par. 2 of the German law on limited liability companies … does not have the purpose of requiring business counterparties to regularly check the power of representation of the Managing Directors …, and intends instead to protect the trust in sufficient authority of representation being given. For a breach of fiduciary duty to be clearly obvious in this sense, it is thus not sufficient if, from the vantage of the third party, the violation of internal obligations potentially is an obvious conclusion ... Likewise, the mere knowledge that the Articles of Association contain a reservation as to approval is not sufficient for determining that this was clearly obvious. On the contrary, [any such determination] must be based on specific circumstances ... The – disputed – assertion by [KWL] that [LBBW], or respectively BW-Bank, who had prepared the credit application for [LBBW] had access to [KWL’s] Articles of Association is thus already without relevance. The Articles of Association do not contain any express requirement to the effect that the conclusion of the CDS/CDO transactions requires the approval of the supervisory boards. Those of its provisions that can be taken into account in this regard are open to an interpretation based on values and in fact require such an interpretation…”
545.	Thus the fact that LBBW had a copy of KWL’s Articles was irrelevant to the question of evident abuse because the Articles were open to interpretation and so it was not clear and obvious that the managing directors required Supervisory Board approval before entering into the STCDO with LBBW. The same reasoning would apply to UBS.
546.	The second question, therefore, if Supervisory Board or shareholder approval was required, is whether UBS was grossly negligent (in the very demanding sense explained above) in failing to realise this.
547.	The experts agreed also that, if prior Supervisory Board approval was required and if the counterparty was grossly negligent in failing to realise this, the transaction would be void. It would be irrelevant to inquire whether as a matter of fact the Supervisory Board would have approved the transaction if it had been asked to do so. It would make no difference also if the fact of the transaction was subsequently notified to the Supervisory Board without objection on the board’s part, even if the failure of the board to react to the information provided to it was itself negligent or grossly negligent or otherwise a dereliction of its duty to the company. These latter questions arose because of the possibility that the reaction of the Supervisory Board to the information provided to it at its 7 September 2006 meeting (see [438] above) could be characterised in this way. However, in view of the experts’ agreed evidence that this would be irrelevant to the issue of evident abuse, they need not be further considered.
Was Supervisory Board approval required?
548.	So far as the Supervisory Board was concerned, the only potentially applicable limitation on the managing directors’ authority contained in KWL’s Articles of Association was that Supervisory Board approval was required in order to enter into any transaction “of fundamental significance”. This limitation was contained in Section 8, paragraph 2 of the Articles which provided as follows:
“(2) The following matters require approval of the Supervisory Board: …
6. acquisition, sale and encumbrance of real estate and similar rights equivalent to real property upwards of a value threshold determined by the supervisory board in the rules of procedure;
7. conclusion of rental, leasehold and leasing contracts for a term and a value upwards of a threshold determined by the Supervisory Board in the rules of procedure;
12. decision regarding investments that are not envisaged in the finance plan, or which exceed a threshold value determined by the Supervisory Board in the rules of procedure;
13. all other matters of fundamental significance, such as the initiation of legal disputes with a shareholder”.
549.	Section 6, paragraphs 9 and 10 of the Rules of Procedure for KWL’s Supervisory Board amplified this paragraph. They provided as follows:
“(9) 	The approval of the Supervisory Board is required for the matters cited in Sec.8 Para.2 of the articles of association. The Supervisory Board can also, by resolution, stipulate its approval for further matters or value limits.
(10)	The value thresholds, for business transactions, which under Sec.8 Para 2 of the articles of association of KWL require the approval of the Supervisory Board are specified as follows:
Acquisition, sale and encumbrance of properties and similar rights (Sec.8 Para.2 No.6) with a business value of over €250,000
The conclusion of lease, rent or leasing agreements (Sec.9 Para.2 No.7) with a term of more than ten years and an annual business value / lease or rent of over €25,000.
Decisions on investments not included in the Finance Plan where these exceed a value of €500,000 (Sec.8 Para 2 No.12)”
550.	None of these financial values applies to the present case, but KWL contends that they show that transactions of fairly limited value were nevertheless considered to give rise to a need for Supervisory Board approval, and therefore demonstrate that the STCDOs, which gave rise to potential exposures of several hundred million euros, would also have been considered matters of fundamental significance.
551.	The requirement in the Articles that Supervisory Board approval must be attained for transactions “of fundamental significance” involves an objective test. The question is not whether the managing directors, the company’s shareholders, or for that matter anybody else, believe (or even reasonably believe) that the transactions are of such significance, but whether they are in fact so, although the reasonable beliefs of those concerned in the transaction may be relevant to the issue of evident abuse. The question whether a transaction is “of fundamental significance” must be determined at the time and not by applying hindsight.
552.	As to the meaning of “fundamental” (or, strictly, the German word “grundsätzlich” of which “fundamental” is a translation), it is not suggested that this is a term of art under German law. It is therefore to be given its ordinary meaning. It is not sufficient, therefore, that the transaction is merely “significant” for KWL. Rather, at least if paragraph 2 of Section 8 of the articles had stood alone, it would be expected that in order to qualify as being “of fundamental significance”, a transaction would have to be something going to the essence or even the existence of KWL. However, the term must be considered in its context, and I would accept that the concept of “fundamental significance” derives some colour from the relatively low values specified in the Supervisory Board’s Rules of Procedure for other categories of transactions where approval is required. (These Rules are not publicly available, so that an outsider would not know what value thresholds had been determined). The specific example of a dispute with a shareholder does not include any value threshold, but does represent (particularly bearing in mind KWL’s position as a quasi public body) a matter of some constitutional significance within KWL. Overall, it is clear that the scope of the managing directors’ authority is such that only transactions of very considerable importance to KWL require prior approval of the Supervisory Board.
553.	Applying this test, I conclude that the transactions were “of fundamental significance” within the meaning of KWL’s Articles because of the sheer scale of the exposures which KWL was undertaking and the potential consequences for KWL if even the relatively low risk of a total loss of its notional were to materialise. The total notional value at stake over all four transactions was equivalent to over US $400 million dollars, of which about half was attributable to the Balaba transaction. This can be compared with KWL’s total annual sales of €145 million during the most recent financial year and its high capital expenditure requirements (between 30% and 50% of its sales revenue) in order to upgrade its facilities and comply with applicable water quality standards.
554.	It is evident from these figures that the total loss of its notional investment would be disastrous, and might possibly be fatal, for KWL, at any rate without significant additional support from its shareholders. It is clear also that, notwithstanding the cross-border leases which it had previously concluded, the transaction was not part of the ordinary course of KWL’s water supply business and was beyond the scope of any in-house expertise on which KWL could draw. It would be surprising, in such circumstances, if an unusual transaction which could have such serious consequences for KWL were not to be regarded as being of fundamental significance within the meaning of the Articles even if, as I have accepted, in absolute terms the risk that these consequences would occur remained relatively low (see [159] above). The position might have been different if the effect of the Balaba transaction had been to reduce KWL’s overall risk, but I have found that its effect was to increase the risks to which KWL was exposed.  Whether to accept those risks was a matter of commercial judgment, but in a case of such significance KWL’s constitution entrusted the judgment to the Supervisory Board as well as the managing directors. It could only be authorised if the managing directors wanted to proceed and the Supervisory Board agreed.

555.	KWL relies also on the fact that Supervisory Board approval had been obtained (and therefore, it says, must have been needed) for the original cross-border leases, and that in 2009 when consideration was being given to unwinding two of the single name CDSs in order to purchase additional subordination, UBS had insisted on Supervisory Board approval being obtained (see [522] above). However, I would not rest my decision on these matters. Neither situation is directly comparable. Approval for the original leasing transactions was required in any event pursuant to other provisions of the Articles of Association and did not depend on whether those transactions were “of fundamental significance”, although I would be inclined to accept that they were. The fact that approval was sought and obtained can therefore shed no real light on what was regarded as falling within the “fundamental significance” paragraph, even assuming this to be a legitimate process of construction of the Articles. In 2009 the effect of what was proposed would have been to eliminate the single name protection afforded by the CDSs and thus to leave KWL doubly exposed to losses (a) in the event of default by the single names and also (b) if the additional subordination purchased proved insufficient to stave off losses under the STCDOs. In any event 2009 was after the crash when banks and others were viewing such transactions in a very different way from how they had been viewing them beforehand and the circumstances of the proposed transaction were very different from those of 2006.

556.	UBS relies on the fact that there was no suggestion at the Supervisory Board meeting on 7 September 2006 that the transaction described by Mr Heininger required (or would require) Supervisory Board approval, but I derive no assistance from this. The presentation by Mr Heininger was so misleading and the members of the Supervisory Board were so inert (see [438] to [441] above) that no conclusion can be drawn from the absence of any such suggestion. In any event, whether a transaction is “of fundamental significance” is primarily a matter for the court and not for the Supervisory Board to determine. While clear evidence of a company’s practice may be relevant, the evidence in this case does not amount to this. 
557.	I should refer also to the opinion provided to KWL by Freshfields to the effect that whether Supervisory Board approval was needed was not clear (see [333] above). This was given on the assumption that the effect of the transaction was “notably” to reduce the risk to KWL (see [357] above). Even in that event Freshfields regarded the position as unclear. If that assumption had been known to be unfounded, as in fact it was, it would seem likely that Freshfields would have expressed themselves differently. It is unnecessary to explore in this judgment why Freshfields, having concluded that the position was unclear, did not advise KWL in stronger terms that, if only as a precaution, it would have been prudent to obtain Supervisory Board approval before proceeding. The fact is that, at least so far as appears from the evidence before me, they did not.
Was shareholder approval required?
558.	Although it adds nothing of substance to its case, KWL also contends that the Balaba STCDO required shareholder approval. It does so for two reasons. 
559.	The first is that section 49(2) of the German Limited Liability Company Act requires the managing directors to refer any transaction for shareholder approval when it seems necessary to do so in order to protect the interests of the company. The experts agreed that this would be necessary if the transaction is one which the shareholders are likely to oppose, especially one which exposes the company to exceptional risk. Whether shareholder approval was required seems to me to depend on what assumption is made about whether Supervisory Board approval would be sought. If the Balaba STCDO had been presented by Mr Heininger to the Supervisory Board as a transaction which would generate upfront cash for KWL of almost US $22 million, it seems likely that the board (on which the shareholders were represented) would have been prepared to approve it. In any event, if the transaction had been presented to the Supervisory Board for approval, as it should have been, there would be no need for additional approval by the shareholders. That would not have been necessary to protect the interests of KWL. However, if the transaction was not to be presented to the Supervisory Board, application of the tests referred to above would mean that shareholder approval would have been required.
560.	Secondly, KWL relies on section 37(1) of the Limited Liability Company Act, which provides that the managing directors must not enter into any transaction which exceeds the objects of the company. As to this, section 2 of KWL’s Articles described KWL’s purpose as being “water supply, wastewater disposal, including other municipal services”. However, it also provided that:
“(2) The company may conduct business that directly or indirectly serves the company purpose”.
561.	In my judgment even though it was outside the scope of KWL’s ordinary business, the Balaba STCDO did, at least indirectly, serve KWL’s purpose (or would have done but for the dishonesty of Mr Heininger and Value Partners). That is because, even allowing for the fact that it represented an increase in risk which it was imprudent for KWL to undertake, it was a means of raising the cash which KWL needed in order to fulfil its investment objectives (see [164] above). Accordingly section 37(1) does not assist KWL. 
Was there “gross negligence” by UBS in failing to appreciate the need for Supervisory Board (or other) approval?
562.	In considering whether there was “gross negligence” (in the sense described above) by UBS, it is important to keep firmly in mind that the question is not whether it would have been prudent for UBS to insist on obtaining Supervisory Board approval (clearly it would, and there was no reason why UBS could not have done so), but whether UBS was grossly negligent in failing to appreciate the need for such approval. Similarly, it is nothing to the point that UBS did not want to have to obtain Supervisory Board approval, as that would have been an additional hurdle to surmount before a profitable deal could be concluded. It is also important that I have found as a fact that UBS never received the opinion provided to KWL by Freshfields, which stated that the need for supervisory board approval was “open to question” (see [293] above). Many of KWL’s submissions on this issue were premised on UBS having received this opinion. If it had done so, and had therefore known for a fact that Freshfields’ own view was that the need for Supervisory Board approval was “open to question”, matters might well have appeared differently.
563.	On this question of gross negligence UBS relies strongly on the Freshfields capacity opinion which was provided to it precisely in order to give comfort to UBS that KWL did have the capacity to enter into the transaction.
564.	The German law experts agreed that the involvement of lawyers acting for KWL in the transaction was a highly relevant consideration. In my judgment UBS was right to rely on the Freshfields opinion. This stated positively and unequivocally, in paragraphs (b) and (c), that KWL had the requisite corporate capacity to enter into the Balaba transaction; that the execution and delivery of the contractual documents by KWL and the performance of its obligations thereunder did not violate any applicable corporate laws or KWL’s Articles of Association; and that the contractual documents had been duly executed on behalf of KWL (see [339] above). Those statements were inconsistent with any want of authority on the part of the signatories who had “duly executed” them. 
565.	It is true that paragraph (c) went on to say that Freshfields had not “verified whether the transactions contemplated in the Operative Documents have been authorised in accordance with the Articles of Association and with any standing orders or other internal guidelines of KWL”, but the same sentence also spelled out that “a violation of any such requirements would not affect the valid execution and delivery of the Operative Documents, except in cases of fraudulent collusion”. KWL does not suggest that this was a case of “fraudulent collusion” or that UBS should have thought that it was. Accordingly, the overall effect of this sentence was to add to, rather than to subtract from, the comfort provided to UBS. Far from saying that this was a point on which Freshfields were not prepared to opine and which UBS must therefore investigate fully for itself, the paragraph was telling UBS that this was a point about which it need not be concerned. Indeed, in the case of the Balaba STCDO Freshfields were not even asked to say positively that Supervisory Board approval was not required.
566.	In any event, even if the effect of this second sentence of paragraph (c) had been to put UBS on enquiry as to the need for Supervisory Board approval, the highest which KWL’s case could realistically be put, it is clear that this does not amount to the existence of massive or solid suspicious objective facts so as to warrant a conclusion that UBS had failed to see what was plain for everyone to see. On the contrary, UBS was under no duty as a matter of German law to investigate whether KWL’s Articles required any particular level of approval, or whether the transaction was “of fundamental significance” for KWL. That is the kind of evaluation which a counterparty is not required to undertake. Nor was UBS under any obligation to examine the Articles at all, even though it had a copy of them. It was entitled to rely on the fact that KWL’s own solicitors had provided an opinion which, whatever else it did, provided not the slightest positive indication of the need for Supervisory Board approval of the transaction, let alone of the existence of massive or solid objective facts to demonstrate such a need. UBS was entitled to take the view that, if it had been plain for everyone to see that such approval was required, it would undoubtedly have been plain to Freshfields, who would have said so. Indeed UBS would reasonably have concluded that if Freshfields had thought that such approval was required, or even if they were uncertain about the matter, they would have advised KWL in strong terms not to go ahead with the transaction without first obtaining such approval.
567.	KWL submits that in addition to the second sentence of paragraph 4(c) there were a number of qualifications which detracted from, and on the question of Supervisory Board approval completely negated, the apparently positive opinions which were expressed in paragraphs 4(b) and (c) of the capacity opinion. It submits that the opinion was “so carefully hedged as to be virtually meaningless”. In this connection KWL relies on assumption 2(h) that the validity of the transaction documents was not affected by “any violation of procedural or substantive requirements which is not evident from the face of the documents”; and on the limited nature of the statement which Freshfields were prepared to make about the enforceability of the transaction in a German court (see [358] above). It is KWL’s case that these statements were “deliberately equivocal … and expressed no view as to whether the transactions are enforceable under German law in the particular circumstances of the case”. This must mean, I suppose, that it was Freshfields who were being “deliberately equivocal”.
568.	However, even if it were correct that Freshfields were being deliberately equivocal, this falls far short of satisfying the requirement of massive or solid objective facts which UBS could not have failed to recognise – unless, that is, KWL’s case is that UBS and Freshfields colluded in producing an opinion designed to give the impression that KWL did have capacity, so that the profitable transaction could proceed, when in fact they both realised that the position was much more uncertain. I do not accept this. It is far fetched. There is no reason to suppose that assumption 2(h) was intended, let alone that it should reasonably or fairly have been understood, substantially to negate the opinions expressed in paragraphs 4(b) and (c). Mr Lancaster did not understand it as doing so. Moreover, as already explained, I attach no significance to what was said about enforceability. I doubt whether any law firm would have been willing to provide an unqualified statement that the transaction would be enforceable. 
569.	Furthermore, it would in my view have been thoroughly disingenuous of Freshfields to produce an opinion which was “deliberately equivocal” --  that is to say, an opinion which appeared to be satisfactory but which on closer scrutiny was careful to say very little, with sufficient caveats for Freshfields to hide behind if they ever needed to do so. I am not prepared to conclude that this is what Freshfields intended to do. Even more to the point, I do not accept that UBS ought to have read the opinion in this way, let alone that it was grossly negligent not to do so.
570.	KWL submits also that the initial inclusion of assumption (k) in the first draft of the opinion, namely that the transaction had been entered into by KWL to reduce its existing risk exposure (see [338] above), and the way in which this assumption was then dealt with, shows that UBS understood that there was at least a risk that KWL did not have capacity because (as UBS knew) in fact the effect of the transaction was to increase and not to reduce KWL’s overall risk. However, the assumption included by Freshfields in this first draft was concerned primarily with KWL’s motivation rather than the effect of the transaction. It was understandable that Mr Lancaster should wish to have the assumption removed. UBS would not want an opinion stating that the validity of the transaction was dependent on KWL’s motivation for entering into it, a point which (if it ever came to the crunch) would be bound to cause disputes. Certainly Mr Lancaster understood, for so long as Freshfields wished to retain the assumption, that it was an important point because it affected what Freshfields were prepared to say about whether KWL had the capacity to enter into the transaction. But he was not an expert on German law and it was reasonable for him to take the view that it was up to Freshfields to decide whether as a matter of German law this assumption needed to be retained as a qualification to their opinion. They decided that it did not.
571.	In any event assumption (k) had nothing to do with the question of Supervisory Board approval. Indeed, as explained by Freshfields, it was directed to an entirely different concern, about potential liability for mis-selling in the light of recent German case law. 
572.	Beside my conclusion that UBS was entitled to rely on the Freshfields capacity opinion as confirming that KWL had capacity to enter into the transaction and as containing nothing to warn that prior Supervisory Board approval was required, the other matters relied on by KWL on this issue amount to very little. The fact that CRC regarded the transaction as unsuitable for a financially unsophisticated counterparty, or that Value Partners repeatedly insisted that KWL’s priority was to generate premium when it was not immediately apparent to UBS for what purpose the money was to be used, or that the deadline imposed by KWL appeared to be arbitrary, fall far short of the massive or solid objective facts required as a matter of German law. 
573.	Viewed from UBS’s perspective, the position was that KWL had entered into the cross-border leases with Supervisory Board approval and was therefore already exposed to the risk of default of the single name defeasance providers; by entering into the STCDOs it was (or at any rate ought to have been) raising liquid finance; and the ratings of the STCDOs were such that they were regarded as being of high quality and subject to very low credit risk, or in the case of the Balaba STCDO, of low credit risk. Although I have found that the STCDOs increased the risks to which KWL was subject, and have criticised the reasoning of some of those within UBS who regarded the deal as “not a bad trade for KWL” (e.g. Mr Rodgers: see [303] above), that was a view which was genuinely held. KWL’s own risk expert, Ms Terri Duhon, was enthusiastic about STCDOs as a product, describing them as “kind of funky in that they were quite cool products actually, we liked them”.
574.	Leaving on one side the bribery and conflict issues which are still to be considered, it was at any rate not grossly negligent for UBS to regard it as a matter of commercial judgment for KWL, given the pre-crash circumstances as they existed in June 2006, whether the increase in risk which the STCDOs represented was worth taking in order to secure the benefit of the substantial premiums which KWL ought to have received and which UBS understood that it would receive. That would depend, in part, on whatever pressures KWL’s management was facing, including from the Supervisory Board but also from its shareholders in the City of Leipzig, to increase its liquidity, and on the purposes to which such funds were to be applied. With hindsight it is obvious that the risks involved were unacceptable. Even at the time it was apparent to some, for example Ms Short in CRC, that this transaction was unsuitable for a company like KWL and involved significant risk. But so far as UBS was concerned, that was a decision for KWL to make and it was not obvious to UBS that only the Supervisory Board could make that decision. It may have been in UBS’s own interests, for example from the point of view of reputational damage if the transaction went wrong, to probe these matters more rigorously than it did and to insist on Supervisory Board approval (and after all, CRC’s concerns about suitability were focused on protecting UBS’s position: UBS owed no duty to KWL not to enter at arm’s length into a transaction which was unsuitable for KWL), but in the absence of some advisory relationship German law places no burden on a bank in the position of UBS not to do so. In addition, Mr Heininger had assured UBS, both in writing in the Risk Disclosure Letter and the Letter of Authority and orally at the 30 May 2006 due diligence meeting, that no further approval was required. He had been managing director of KWL for many years and UBS had no reason to regard him as dishonest. It was not grossly negligent to accept his assurance.
575.	I conclude, therefore, that KWL had capacity to enter into the Balaba transaction (or, if this is the relevant analysis, that Mr Heininger and Dr Schirmer were authorised to do so on its behalf). I have reached my own conclusion on the issue of “gross negligence”/“evident abuse” without relying on the conclusion reached by the Leipzig Regional Court in the litigation between LBBW and KWL as that decision is subject to appeal. However, the reasoning and conclusion of the Leipzig Court on directly comparable facts (see [544] above) provides strong support for the conclusion which I have reached.
576.	If it fails on the issue of “gross negligence”/“evident abuse” in relation to Supervisory Board approval, KWL does not suggest that it could succeed on that issue in relation to shareholder approval, even assuming that approval to have been required.
BRIBERY
577.	It was common ground throughout the trial that Mr Heininger was paid a bribe by Messrs Senf and Blatz in connection with the conclusion of the STCDO transactions. In closing UBS suggested that the facts could also be viewed as a conspiracy between Messrs Heininger, Senf and Blatz to defraud KWL and to split the proceeds between them, which arose out of their existing corrupt relationship. I did not understand UBS’s description of the matter in this way to mean that it was resiling from its admission that Mr Heininger was bribed and, in any event, it would not in my view be just to permit it to do so when this was the basis on which the trial was conducted. Undoubtedly Mr Heininger was bribed to cause KWL to enter into the transactions, albeit that he was from the outset a willing and even enthusiastic participant as a result of having already been corrupted by Messrs Senf and Blatz in their previous business together and that the money with which he was bribed was KWL’s own money, part of the premium generated by the transaction. 
578.	As the Supreme Court has recently affirmed, bribery is an evil practice towards which the law takes a particularly stringent attitude (FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2014] 2 All ER 425 at [42], where Lord Neuberger said):
“Wider policy considerations also support the respondents' case that bribes and secret commissions received by an agent should be treated as the property of his principal, rather than merely giving rise to a claim for equitable compensation. As Lord Templeman said giving the decision of the Privy Council in Attorney General for Hong Kong v Reid [1994] 1 AC 324, 330H, ‘[b]ribery is an evil practice which threatens the foundations of any civilised society’. Secret commissions are also objectionable as they inevitably tend to undermine trust in the commercial world. That has always been true, but concern about bribery and corruption generally has never been greater than it is now – see for instance, internationally, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 1999 and the United Nations Convention against Corruption 2003, and, nationally, the Bribery Acts 2010 and 2012. Accordingly, one would expect the law to be particularly stringent in relation to a claim against an agent who has received a bribe or secret commission.”
579.	While Lord Neuberger’s reference to the particular stringency of the law was made in the context of a claim against an agent who has received a bribe, the same “wider policy considerations” apply equally to a claim against the party who has paid a bribe or whose agent, acting within the scope of his agency, has done so.
580.	KWL contends that the Balaba STCDO was voidable and has been avoided as a result of the bribe paid to Mr Heininger. In opening it did so on the basis of either of two analyses:
a.	As a matter of fact, Mr Senf and Mr Blatz were acting pursuant to a strategic partnership with UBS in procuring KWL’s entry into the STCDO transactions. They were – and were known to at least Mr Bracy of UBS to be – seeking to cause KWL to enter into the STCDO transactions in UBS’s interests, regardless of whether the transactions were in the interests of KWL. The result, according to KWL, is that the law will treat Mr Senf and Mr Blatz as agents of UBS for the purpose of bringing about the STCDO transactions with KWL. Their knowledge of the bribe is thus to be attributed to UBS. The Balaba STCDO was therefore voidable at the instance of Mr Heininger’s defrauded principal, KWL, and has been avoided.
b.	Alternatively, as a matter of law, where a contract is procured through payment of a bribe, it is voidable whether or not the contractual counterparty knew of or authorised payment of the bribe. Whether or not Mr Senf and Mr Blatz are to be regarded as agents of UBS, the Balaba STCDO was therefore voidable because the bribe paid to Mr Heininger means that it would be inequitable for UBS to be allowed to enforce it, and it has been avoided.
581.	The second analysis was based on dicta of Robert Goff LJ in The Ocean Frost [1986] 1 AC 717 at 745C:
“… I wish to reserve the question whether a party to a contract induced by the bribery of his servant by a stranger, or indeed a party to a contract induced by the fraud of a stranger, should not be entitled to rescind the contract on the discovery of the bribery or the fraud, on the basis that it would be inequitable for the other party, though innocent, to hold him to a contract so procured.”
582.	However, in Donegal International Ltd v Zambia [2007] EWHC 197 (Comm) at [496] Andrew Smith J rejected what appears to be the same argument, saying:
“Zambia also plead that ‘the Settlement Agreement was sufficiently connected with such illegality and/or corruption so as to render it inequitable for Donegal to [be] permitted to enforce the Settlement Agreement against Zambia in this jurisdiction or at all, whether or not Donegal knew or was responsible for, or was party to, such conduct’. Zambia did not develop this point in their submissions except to draw it to my attention that in Armagas Ltd v Mundogas SA [1986] 1 AC 717 at p.745C Robert Goff LJ expressly reserved ‘the question whether a party to a contract induced by the bribery of his servant by a stranger, or indeed a party to a contract induced by the fraud of a stranger, should not be entitled to rescind the contract on the discovery of the bribery or the fraud, on the basis that it would be inequitable for the other party, though innocent, to hold him to a contract so procured’. As I understand it, this pleading was directed to an argument that Zambia would advance if Donegal were not responsible for improper conduct on the part of Mr O'Rourke, Mr Mwale or Mr Chilupe, and so, on the findings that I have made, this point does not arise. I therefore only say that if Zambia are relying upon any more general equity, I do not recognise the principle on which they rely.”
583.	In the course of oral closing submissions, KWL said that it would not invite me to depart from the Donegal decision (although in fact, as appears from the passage above, it was a point which Andrew Smith J said did not arise) and therefore would not pursue further before me this second way of putting its case on bribery. However, it reserves the right to argue the point in the event of an appeal. 
584.	I would in any event be inclined to agree with Andrew Smith J. If a contract is to be rendered unenforceable on general equitable grounds, there would need to be some conduct affecting the conscience of the party seeking to enforce the contract. Where the conduct in question is a bribe of which the party seeking to enforce the contract was completely ignorant and where it had no responsibility, whether pursuant to an agency analysis or otherwise, for the conduct of the party which paid the bribe, it is hard to see how that requirement could be satisfied.
585.	As a result of KWL’s decision not to pursue this way of putting its case, it became unnecessary to explore whether, in the event that there is some general equitable principle rendering the contract unenforceable, an exception to that principle applies in the event of a change of position by an innocent counterparty – such as, for example, by UBS entering into the contracts by which it sold credit protection in the market in order to hedge its position with KWL and to generate the premium required to be paid to KWL and to fund the CDSs, as well as to provide for its own profit, contracts on which UBS has undoubtedly made very substantial losses (see [134] above).
586.	 I turn, therefore, to the primary way in which KWL puts its case on avoidance of the transaction for bribery. 
Bribery – the law
587.	KWL does not suggest that UBS, even in the person of Mr Bracy, was aware of the bribe paid to Mr Heininger. Its case is that Value Partners is to be regarded as the agent of UBS for the purpose of procuring KWL to enter into the Balaba STCDO, and that in paying the bribe it was acting within the scope of that agency even though its principal, UBS, was not aware of the bribe.
588.	Where the agent of one party to a contract pays a bribe to the agent of the other party, the party whose agent was bribed is entitled to avoid the contract (and claim damages from the principal of the agent who paid the bribe). The law here is as stated by Robert Goff LJ in The Ocean Frost [1986] 1 AC 717 at 743B to 745C in a passage which is worth quoting at length:
“There is a singular dearth of authority in this country on the legal position of a principal whose agent bribes the servant of a third party in order to induce the third party to enter into a contract with his principal. In all the English cases, the briber appears to have been himself the principal, or (as in the original Panama case, LR 10 Ch App 515) the servant or agent of a principal who has authorised him to enter into the transaction which gave rise to the bribe, so that there was no doubt that the bribe could be imputed to the principal. I shall however first of all consider the liability of the principal in damages, where his agent has without his authority, or indeed knowledge, bribed the servant of the third party to induce the third party to contract with his principal. It is now established that the claim against the briber for damages, which appears in origin to have been a claim for equitable fraud, should be regarded as a claim in damages in tort: see the Mahesan case [1979] AC 374, 383, per Lord Diplock. Accordingly, the liability of the principal for the agent's tort must depend upon the principles of vicarious liability, in so far as those principles are applicable in the case of an agent who is not a servant. Certainly, the principal cannot be liable unless the agent was acting in the course of his employment as such or (as is sometimes said) in the course of his authority. For an example where a principal was so held liable, we have the authority of the decision of this court in Hamlyn v John Houston & Co [1903] 1 KB 81. That was a case in which one partner was held liable in damages to the plaintiff for the conduct of another partner in bribing a servant of the plaintiff to communicate to him information concerning the plaintiff, where it was within his authority to obtain such information by legitimate means. Collins MR said, at p. 85: 
‘If the act done by the agent is within the general scope of the authority given to him, it matters not for the present purpose that it was directly contrary to the instructions of his principal, or even that it may have been an offence against society itself. The test is that which is applied to this case by the learned judge. Was it within the scope of the authority given to Houston to obtain this information by legitimate means? If so, it was within the scope of his authority for the present purpose to obtain it by illegitimate means, and the defendants are liable.’
I next ask myself … whether Mr. Johannesen, in offering a piece of the ship to Mr. Magelssen, was acting in the course of his employment or authority as agent for the joint venturers. … In those circumstances, Mr. Johannesen having concluded by illegitimate means the transaction which he was authorised to conclude by legitimate means, in my view the other joint venturers were liable in damages in the same way as the partner was liable in Hamlyn v John Houston & Co [1903] 1 KB 81.

I next ask myself ... whether, where an agent has, in the course of his employment or authority, bribed the servant of a third party to induce the third party to contract with his principal, the third party is entitled to rescind the contract or, if it is too late to rescind, to bring it to an end. It was argued before us by Mr Alexander that this is not the law, and that only where the bribe can be imputed to the principal as having been within the agent's authority is the third party entitled either to rescind, or determine, the contract with the principal: in practical terms, this is likely to occur only where the agent's bribe was actually authorised by his principal, as in Panama and South Pacific Telegraph Co v India Rubber, Gutta Percha, and Telegraph Works Co., LR 10 Ch App 515, because it is difficult to imagine a case where such a bribe, if not actually authorised, is within the agent's ostensible authority. No English authority on the point was cited to us; but we are indebted to the industry of Mr Pollock and his junior, Mr. Siberry, for the citation of a decision of the Supreme Court of Canada on the point, Barry v Stoney Point Canning Co (1917) 55 SCR 51, a case which was not cited to the judge. In that case it was held by a majority of the Supreme Court that, where the agent acted in the course of his employment in making a bribe to the third party's own agent, the third party could on this ground justify his repudiation of the contract with the bribing agent's principal. The leading judgment of the majority was delivered by Anglin J. He said, at p. 80: 
‘Finally the fact that the agreement to split the commission was not made by the plaintiffs themselves, but by their agent Millman, is not an answer to the defendant's assertion of his right to repudiate. What Millman did was done while purporting to act within the scope of his employment, and in the course of the service for which he was engaged by the plaintiffs; and it is immaterial that it may have been in his own interest as well as in, or even to the exclusion of, that of the plaintiffs. Lloyd v Grace, Smith & Co [1912] AC 716. The defendant's agent was given the disqualifying adverse interest which made him incapable of binding his principal.’
Although this decision is not binding upon us, it constitutes strong persuasive authority; and I respectfully agree with it and adopt it. Applying it to the present case, it would, I consider, be strange indeed if a principal whose agent had, in the course of his employment, bribed the third party's agent, should, though liable in damages to the third party, be entitled nevertheless to resist a claim by the third party to rescind the contract or, if it was too late to rescind, to bring it to an end on the ground of the bribe. Indeed, it can be argued that the case of rescission is stronger than the case of vicarious liability for damages …”
The bribery issues
589.	It is therefore unnecessary for KWL to show that UBS authorised the bribe or that it knew or even should have known about it. It is (at least prima facie) sufficient to enable KWL to avoid or rescind the contract if Value Partners was acting as the agent of UBS and paid the bribe to Mr Heininger in the course of its employment as agent, despite the fact that payment of the bribe was unknown to and unauthorised by anyone at UBS. Accordingly two questions arise. The first is whether Value Partners was the agent of UBS. If so, the second question is whether in paying the bribe to Mr Heininger it was acting within the scope of its agency relationship with UBS. I defer consideration of a third question, whether avoidance or rescission (for present purposes the terms are interchangeable) is an appropriate remedy, until after I have dealt with all three of the grounds on which KWL contends that the STCDO was voidable. UBS submits that rescission should be refused on the grounds that it would be disproportionate and that KWL does not have “clean hands”. 
590.	UBS contends that KWL’s case fails on the facts. In outline, it submits that:
a.	KWL’s case ignores the express agreements in place between the relevant parties whereby Value Partners expressly agreed to act as KWL’s agent. That agreement was contained in the engagement letter with Value Partners signed by Mr Heininger on behalf of KWL on 26 April 2006 (see [212] above). Moreover, not only is there no written agency agreement between UBS and Value Partners, but in the letter dated 8 June 2006 (prepared as a part of UBS’s credit approval process: see [326] above) Value Partners expressly represented and agreed with UBS that it had conceived the transaction and marketed it to KWL and that it had been mandated by KWL before the transaction was brought to UBS.
b.	The bribe was paid to Mr Heininger on 21 June 2006, which was an early stage in the dealings between UBS and Value Partners and before many of the factual matters occurred on which KWL relies for its agency case. 
c.	KWL’s case ignores also various indications showing that Value Partners was not acting as agent of or in partnership with UBS.
d.	Even if, contrary to UBS’s primary case, Value Partners is to be regarded as UBS’s agent, payment of the bribe was not within the scope of such agency.
Was Value Partners the agent of UBS?
591.	Undoubtedly Value Partners was the agent of KWL. There was an existing (and already corrupt) relationship between Value Partners (and its predecessor Global Capital Finance) and KWL which ante-dated any contact with UBS. In early 2006 Mr Heininger had discussed with Messrs Senf and Blatz the possibility of restructuring KWL’s cross-border lease arrangements in order to generate additional funds. In those early discussions, which took place before the initial contact with Mr Bracy on 6 April 2006, it was apparent that any such restructuring would not only be for the legitimate purpose of raising funds for KWL, but would also involve the personal enrichment of Mr Heininger and the corrupt exploitation by Value Partners of its relationship with Mr Heininger and thus with KWL. Indeed, personal enrichment was throughout the primary motivation for all three of these dishonest individuals. 
592.	From the outset, KWL was introduced to UBS as a client of Value Partners, as in fact it was. It was not even named for a few weeks after the discussions began, but was referred to anonymously as one of Value Partners’ clients. Moreover, the relationship between KWL and Value Partners was formalised by the engagement letter dated 26 April 2006 signed by Mr Heininger (see [212] above), as it happens the day before Value Partners identified its client as KWL. This leaves no room for doubt that Value Partners was acting as KWL’s agent in connection with the proposed transaction. It was precisely because Value Partners was known to be KWL’s agent that its request to be paid “fair compensation” for recommending UBS GAM as the portfolio manager ([214] above) was obviously improper. The Risk Disclosure Letter signed by Mr Heininger on 24 May 2006 ([272] above) also referred to KWL having obtained advice from such advisers as it deemed necessary, which in context was evidently a reference to Value Partners.
593.	However, the fact that Value Partners was the agent of KWL does not preclude a finding that it was also the agent of UBS. It is possible for an agent to act as the agent for both parties to a transaction, although that will generally (and would here) put the agent in an impossible position. As Lord Neuberger put it in FHR European Ventures at [5]:
“… ‘[a] fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other’. Because of the importance which equity attaches to fiduciary duties, such ‘informed consent’ is only effective if it is given after ‘full disclosure, to quote Sir George Jessel MR in Dunne v English (1874) LR 18 Eq 524, 533.”
594.	For the purpose of determining whether Value Partners was the agent of UBS and therefore of both parties, it does not matter whether the relationship between Value Partners and UBS was one which the parties regarded as an agency relationship. What matters is whether they had agreed to a relationship which, regardless of how they regarded it, amounted in law to an agency relationship. As Lord Pearson explained in Garnac Grain Co Inc v H.M.F. Faure & Fairclough Ltd [1968] AC 1130 at 1137:
"The relationship of principal and agent can only be established by the consent of the principal and the agent. They will be held to have consented if they have agreed to what amounts in law to such a relationship, even if they do not recognise it themselves and even if they have professed to disclaim it. ... But the consent must have been given by each of them, either expressly or by implication from their words and conduct. Primarily one looks to what they said and did at the time of the alleged creation of the agency. Earlier words and conduct may afford evidence of a course of dealing in existence at that time and may be taken into account more generally as historical background. …”
595.	In Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 Lord Wilberforce cited this passage and continued at 587:
“The significant words, for the present purpose, are ‘if they have agreed to what amounts in law to such a relationship.’ These I understand as pointing to the fact that, while agency must ultimately derive from consent, the consent need not necessarily be to the relationship of principal and agent itself (indeed the existence of it may be denied) but may be to a state of fact upon which the law imposes the consequences which result from agency. It is consensual, not contractual. So interpreted, this formulation allows the establishment of an agency relationship in such cases as the present.”
596.	On the findings which I have already made in the narrative section of this judgment (see e.g. [188] to [201] above), UBS and Value Partners did agree to a relationship which as a matter of law amounted to an agency relationship. From as early as April 2006 there was in place an arrangement between Mr Bracy and Value Partners whereby Value Partners would advise clients which it had represented in connection with cross-border leasing transactions to conclude STCDOs with UBS. It described this arrangement in terms of “delivering the client” to UBS. Indeed, Mr Bracy described Value Partners to his boss in May 2006 as having “captive clients”, including KWL, who would in practice do what Value Partners recommended (see [223] and [224] above). He later made clear his understanding that in practice Value Partners would exercise a degree of “control” over clients in directing business to UBS (see [399] to [403] above). It was quite clear to Mr Bracy and to Value Partners that the purpose of their arrangement was to make money for Value Partners and (indirectly) for Mr Bracy, regardless of whether the transaction was in the clients’ best interests. All this went well beyond an understandable desire to do business or further business together if suitable opportunities arose.
597.	The arrangement which I have found to exist was made by Value Partners with Mr Bracy, but UBS does not suggest that in this respect Mr Bracy was acting outside the scope of his authority and accepts that for this purpose Mr Bracy’s knowledge was to be regarded as the knowledge of UBS (see [80] above).  In any event, Mr Bracy was not slow in claiming credit for having established such a valuable relationship with Value Partners, for example in the “captive clients” email sent to his boss in the Municipal Securities Group. It was therefore an arrangement which must be regarded as having been made between UBS (acting by Mr Bracy) and Value Partners, and not by Mr Bracy acting on a frolic of his own. That is further underlined by the warm congratulations extended to Mr Bracy by UBS’s senior management once the Balaba transaction was concluded and the explicit encouragement given to him to develop the relationship further (see [371] to [390] above). 
598.	It is clear too that throughout the period between April 2006 and the conclusion of the Balaba transaction, UBS (primarily but not exclusively in the person of Mr Bracy) and Value Partners did work together in order to ensure the conclusion of the transaction, regardless of KWL’s interests. This working together can be seen in the request, albeit not acceded to, for payment in return for recommending UBS GAM as portfolio manager (see [214] above); the preparations for the 9 May 2006 “kickoff” meeting ([225] and [226]); the silencing of Mr Cox ([251] to [256]); the e-mails exchanged between Mr Bracy and Messrs Senf and Blatz in connection with the visit to Wilmington Trust which show a clear alignment between UBS and Value Partners on the one hand and the “client” on the other ([262] to [265]); the briefing of Mr Heininger in preparation for the 30 May 2006 due diligence meeting ([286] to [290]); the care taken to ensure that Dr Schirmer did not have a full understanding of the financial aspects of the transaction ([314] and [315]); and the rather shocking efforts made by Mr Bracy and Mr Senf to remove language from the draft Freshfields opinion which might represent an obstacle to the conclusion of the transaction ([344] to [351]).
599.	It is true that some of the matters on which KWL relies in connection with its agency case occurred after the conclusion of the Balaba STCDO and after 21 June 2006 when the bribe was actually paid to Mr Heininger. These included most notably the 11 July 2006 email regarding Mr Maron’s client list (see [190] to [196] above) and the “letter for K” episode ([456] to [466]). I would accept that the issue is whether an agency relationship was in existence by the time when the bribe was paid (alternatively when the contract was concluded). I find, however, that these later matters constitute evidence of the arrangement between Mr Bracy and Messrs Senf and Blatz which existed from the outset. 
600.	UBS relies on seven specific points which, so it contends, demonstrate that Value Partners was not acting as UBS’s agent. These are as follows.
a.	Value Partners appeared to have an existing client base in its own right, not won through UBS; 
b.	KWL was one of these clients, and had a history of working through individuals at Value Partners in respect of the cross-border leases;
c.	KWL approached Value Partners in respect of the CDOs, not vice versa;
d.	Value Partners never asked UBS for any payment for completing the STCDOs;
e.	Value Partners preserved the anonymity of KWL until 27 April 2006;
f.	Value Partners made demands on KWL’s behalf, and referred back to KWL for instructions; and
g.	There were several occasions in the period up to 21 June 2006 when Value Partners acted contrary to UBS’s interests. 
601.	Points (a), (b) and (e) are correct in point of fact, but are not inconsistent with the arrangement which I have found to exist. On the contrary, the fact that Value Partners had well established relationships with a number of clients who had entered into cross-border leases and who might be persuaded to enter into STCDOs with UBS was one of the attractions of the arrangement so far as Mr Bracy was concerned. 
602.	Point (d) is factually correct, but only if strictly limited to payment for entering into the STCDOs as distinct from the Portfolio Management Agreements and to the period before Messrs Senf and Blatz visited Mr Ryan in Connecticut “to figure out whether they are willing to pay some money in order for us to bring deals to UBS” (see [393] above). However, the fact that Value Partners was not remunerated directly by UBS was not the point. It was always understood that Value Partners’ remuneration would be paid out of the premium payable to its client which would be generated by the transaction. If Value Partners had succeeded in persuading UBS to make payments “in order for us to bring deals to UBS”, such payments would have been merely additional icing on an already rich cake. 
603.	As to point (c), it is not correct that KWL approached Value Partners in respect of the CDOs (see [171] to 181] above). In any event, however, what matters for present purposes is not who initiated the idea of an STCDO or who approached whom, but what if any arrangement was made between Mr Bracy and Value Partners once the STCDO concept had been put on the table.
604.	As to points (f) and (g), UBS relies on such matters as Value Partners’ demands for aggressive pricing (i.e. for the highest possible premium), requests for information about the STCDOs which could be provided to KWL, and the fact that the short timetable for the transaction was driven by KWL. It relies also on a threat made by Value Partners to take the transaction to Deutsche Bank if the refusal by UBS’s CRC could not be overcome in a manner consistent with meeting KWL’s premium target. However, I see nothing in these matters which is inconsistent with the arrangement which I have found to exist.
605.	I conclude, therefore, that the relationship between UBS and Value Partners was such as to amount in law to an agency relationship. Its role as agent of UBS was for the purpose of procuring KWL to enter into the STCDO with UBS. That conclusion is not precluded by the terms of the letter dated 8 June 2006 in which Value Partners expressly represented and agreed with UBS that it had conceived the transaction and marketed it to KWL and that it had been mandated by KWL before the transaction was brought to UBS. Even if that letter had been expressed in more explicit terms, for example by stating that Value Partners had not acted as the agent of UBS, such a statement could not prejudice KWL if in reality the facts were such, as I have found that they were, to constitute Value Partners the agent of UBS. To hold otherwise would be inconsistent with Lord Pearson’s statement in the Garnac Grain case set out at [594] above that an agency relationship will exist if the parties have agreed to what amounts in law to such a relationship, even if they have professed to disclaim it and with Lord Wilberforce’s statement in Branwhite that the relationship of principal and agent may be found to exist even if its existence is denied by the parties themselves. In any event, UBS knew that the statements in the letter were not true (see [324] above). The letter was simply the deal team’s way of getting round the problem that Value Partners had not produced any marketing materials which UBS could retain on file in order to satisfy the approval conditions imposed by its senior management.
606.	This is not to say that the arrangement between Mr Bracy and Value Partners was a legally binding contract which UBS could have enforced, for example by claiming damages from Value Partners if it had after all taken a transaction to (say) Deutsche Bank instead of UBS. There are several grounds on which such a claim would have been likely to fail. However, this does not matter. As Lord Wilberforce put it in Branwhite, the relationship which must be found to exist is consensual, not contractual. There must exist a state of facts upon which the law imposes the consequences which result from agency. In my judgment that relationship existed in the present case.
607.	The result, therefore, is that Value Partners was the agent of both UBS and KWL. It is obvious – and was obvious to Mr Bracy – that his arrangement with Value Partners was irreconcilable with Value Partners’ duty to KWL to provide it with disinterested and independent advice.
608.	On the findings which I have made there is no question here of any “informed consent” by KWL to the agency relationship between UBS and Value Partners. Even if Mr Heininger knew about it, which seems doubtful, UBS can hardly rely on consent by the very man who took the bribe. (The question whether Mr Heininger’s knowledge should be attributed to KWL is considered more fully below in the context of the “conflict of interest” defence which was the context in which it was addressed by the parties). While it was UBS’s case that Dr Schirmer knew that the relationship between Value Partners and Mr Heininger was improper, it was not suggested that Dr Schirmer, or indeed anyone else at KWL, knew about the arrangement between Mr Bracy and Value Partners for the delivery of Value Partners’ clients to UBS.
Was payment of the bribe within the scope of the agency?
609.	The next question, on the basis that Value Partners was operating in a dual (and hopelessly conflicted) capacity as the agent of both UBS and KWL, is whether in paying the bribe to Mr Heininger, Value Partners was acting within the scope of its agency as the agent of UBS so as to make UBS responsible in law for the consequences of the bribe. This is not the same as asking whether UBS authorised payment of the bribe. Plainly it did not. But that is not the issue. No honest principal authorises its agent to pay a bribe, but as The Ocean Frost shows, a principal may nevertheless be responsible in law for the consequences of a bribe paid by its agent within the course of the agent’s employment or authority. 
610.	Petrotrade Inc v Smith [2000] Lloyd’s rep 486 is another example where this principle was applied. David Steel J said:
“21. It is common ground that Mr. Van der List and Mr. Tissot both had authority to enter into port agency contracts and to make provision for rebates or commissions. The arrangements that they effected with Mr. Smith can be categorized as the conclusion by illegitimate means of a transaction that they were authorized to conclude by legitimate means. It follows that Alpina is vicariously responsible as a matter of English law for the fraud involved in those illegitimate means: see Hamlyn v. Houston & Co [1903] I KB 81.”
611.	KWL submits that this is what happened here: Value Partners was UBS’s agent for the purpose of procuring its clients to contract with UBS and that is what it did. The fact that it did so by means of a bribe not known to or authorised by UBS does not take its conduct outside the scope of its agency.
612.	No case was cited in which a bribe was paid by an agent who was in an agency relationship with both parties to the transaction, although UBS did cite Nayyar v Denton Wilde Sapte [2009] EWHC 3218 (QB), [2010] PNLR 15 in this connection. A question arose whether the defendant firm of solicitors was vicariously responsible for the conduct of a solicitor employed by the firm who encouraged the claimants to pay what they knew was intended to be a bribe. The solicitor was employed by the firm not only to provide legal advice to clients but also in a business development role. The claim failed in any event on the ground of ex turpi causa in view of the claimants’ knowledge of the intended purpose of the payment, but Hamblen J also held that the claim against the firm would have failed on the ground that the solicitor was acting outside the scope of her employment. That was because, on the facts, the solicitor was not acting as a solicitor (whether performing an advisory or a marketing role) but as a deal broker with a personal stake in the deal in question. The test applied to determine whether the firm was vicariously liable for her conduct was whether that conduct was so closely connected with her employment that it would be fair and just to hold the employer responsible, a test which would be satisfied if the conduct was in the ordinary course of or reasonably incidental to the employment. However, the facts of Nayyar and the issues which arose there are rather different from those arising in the present case. The decision illustrates that a principal’s responsibility for the acts of an undoubted agent or employee will only extend to acts within the scope of the agency or employment, but does not address the problem of dual principals, where an agent’s misconduct may be within the scope of conflicting duties owed to each.
613.	UBS submits that it would be commercially unreal to find that the bribe was paid by Value Partners in its capacity as an agent of UBS in circumstances where (as I have found) the proposed transaction was corrupt from the outset as between Value Partners and Mr Heininger, before UBS was even involved, with Mr Heininger having engaged Value Partners as KWL’s agent specifically with a view to his own personal enrichment (in his words, “the subject of bonus was always in the air between Senf, Blatz and me”: see [165] above). UBS submits that there was no or no sufficient connection between the agency relationship, which for this purpose UBS and Value Partners must be assumed to have had, and the payment of the bribe made pursuant to an antecedent corrupt relationship.
614.	KWL relies in this connection on what was said by Andrew Smith J in Fiona Trust & Holding Corporation v Privalov [2010] EWHC 3199 (Comm) at [70] to [73]. While I see no reason to disagree with anything in those paragraphs, I do not think that they are directed to any issue about whether or not a bribe paid by an agent should be regarded as having been paid within the scope of his agency so as to render the principal responsible for the bribe. Rather they are concerned to identify what constitutes a bribe for the purposes of civil claims. They show that English law takes a broad view of this in order to protect the party whose agent or employee is bribed, so that (for example) it is unnecessary to show dishonesty by the giver or recipient of the bribe and unnecessary to show that the bribe in fact influenced the recipient to act in a way which he would not otherwise have done.
615.	In my judgment the correct approach in a case where the agent is an agent of both parties to the transaction is to ask whether in paying the bribe the agent was acting within the scope of its agency as the agent of the party seeking to enforce the contract. That involves a consideration of the scope of the agency relationship. If it was so acting, however, the enforcing party must accept the legal consequences of the bribe even if the agent was also the agent of the other party and even if the payment of the bribe was also within the scope of that other agency. It cannot avoid those consequences on the ground that the agent paid the bribe in breach of the fiduciary duties which it owed to the other party, as Value Partners undoubtedly did on the facts of this case. That is so regardless of which agency relationship was first in time or more firmly established. It makes no difference, therefore, that KWL had an established relationship with Value Partners which ante-dated any contact with UBS. Nor does it matter that the relationship between Value Partners and Mr Heininger was already corrupt.
616.	I reach these conclusions for three reasons. First, they represent a straightforward application of the law as set out by Robert Goff LJ in The Ocean Frost. Second, a principal who enters into an agency relationship with an intermediary who is also the agent of the other party knows or ought to know that the agent owes conflicting and potentially irreconcilable duties. That is a risk which the principal runs. Third, as already noted, the policy of the law is to view bribery in commercial transactions with particular stringency, as explained by Lord Neuberger in FHR European Ventures (and see also the material collected by Hamblen J in the Nayyar case at [83] to [96] of his judgment). To hold that a principal was not responsible for a bribe paid by its agent acting within the scope of the agent’s employment would run counter to that policy. The fact that the agent also happens to be the agent of the other party, or that payment of the bribe also represents a flagrant breach of the fiduciary duties which the agent owes to that other party, does not provide sufficient justification for doing so.
617.	Applying this test, I accept KWL’s submission that the bribe paid by Value Partners was paid in the course of its employment as an agent of UBS. It was paid for the very purpose for which Mr Bracy on behalf of UBS had engaged Value Partners, namely to direct STCDO business to UBS from its clients, regardless of whether it was in the clients’ interest to enter into such transactions. It was paid from the proceeds of the transaction into which KWL had been induced to enter. 
618.	KWL relies on the passage from Hamlyn v John Houston & Co cited by Robert Goff LJ in The Ocean Frost to the effect that if it is within the scope of an agent’s authority to do something by legitimate means, it is likewise within the scope of his authority do the same thing by illegitimate means. The facts of the present case are even stronger, bearing in mind that the agency arrangement between Mr Bracy and Value Partners was inherently illegitimate, involving as it did an abuse of the trust imposed in Value Partners by their clients of which Mr Bracy was aware.  Adapting what was said in Hamlyn v John Houston & Co to the facts of the present case, if it was within the scope of Value Partners’ authority to procure a contract with UBS by one illegitimate means (abuse of its position as a trusted financial adviser), it is hard to see how it could be outside the scope of its authority to procure exactly the same contract by a different illegitimate means (bribery). 
619.	Indeed, for UBS to avoid the consequences of payment of a bribe by Value Partners on the ground that Value Partners had a prior agency relationship with KWL would be ironic. As already noted, it was because of that prior relationship with KWL and other clients (“These guys directly or through client referrals ‘own’ Germany and Switzerland with respect to the public marketplace”: see [262] above) that Mr Bracy was attracted to Value Partners and made the arrangement with them in the first place.
620.	Leaving aside for the moment the question whether the remedy of rescission is available, I conclude, therefore, that UBS is responsible in law for the bribe paid to Mr Heininger. 
CONFLICT OF INTEREST
621.	KWL’s next defence is that it was entitled to rescind and has rescinded the Balaba STCDO on the ground that, by reason of the closeness of the relationship between UBS and Value Partners, it was deprived of the disinterested advice of its agent Value Partners. In one sense an agent remunerated by commission is always subject to a conflict of interest. A financial adviser who will not be paid if no transaction is concluded has an obvious short term interest in ensuring that it is, although it may be in the client’s interest not to do the deal. A wise adviser may take a longer term view, preferring to keep a long term relationship with a satisfied client, but experience suggests that not all advisers can be relied on to act in this way. However, the conflict of interest to which KWL contends that Value Partners was subject goes well beyond the kind of conflict which exists when any agent is remunerated by commission. It consisted of the close relationship between UBS and Value Partners, whereby UBS held out to Value Partners the incentive of lucrative further business so that it would be in Value Partners’ interests to ensure that this first deal with KWL would be concluded regardless of KWL’s interests. 
Conflict of interest – the law
622.	An agent owes to his principal a fiduciary duty of single-minded loyalty. He must avoid conflicts of interest, as explained in the classic judgment of Millett LJ in Bristol & West Building Society v Mothew [1998] Ch 1 at 18:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.” 
623.	Where an agent has a conflict between his interest and his duty which is not disclosed to his principal, the principal is entitled to rescind any contract entered into by that agent. The law relevant to this issue is as stated by Millett J in Logicrose Ltd v Southend United Football Club Ltd [1988] 1 WLR 1256 at 1260-1:
“The remedy [of rescission] is not confined to cases where the agent has taken a bribe or secret commission in the strictest sense. It is available whenever, without his principal's knowledge and consent, the agent has put himself in a position where his interest and duty may conflict. A principal is entitled to the disinterested advice of his agent free from the potentially corrupting influence of an interest of his own. Any such private interest, whether actual or contemplated, which is not known and consented to by his principal, disqualifies him: see the Panama case, LR 10 Ch App 515, 528-529 and Parker v McKenna (1874) LR 10 Ch App 96, 118. It is immaterial whether the agent's mind has been affected or whether the principal has suffered any loss as a result: ‘the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that’: Parker v McKenna, at pp. 124-125 per James LJ; see also at p. 118 per Lord Cairns LC and Shipway v Broadwood [1899] 1 QB 369, 373 per Chitty LJ. The principal, having been deprived by the other party to the transaction of the disinterested advice of his agent, is entitled to a further opportunity to consider whether it is in his interests to affirm it.”
624.	However, as Millett J went on to explain, it is not sufficient that the principal has in fact been deprived of the disinterested advice of his agent. This must be caused by or at least known to the other party:
“That in itself is not sufficient to entitle S. U. F. C. to a fresh opportunity, as against the plaintiffs, to consider whether it is in their interests to affirm the transaction. For this purpose they must establish that they were deprived of the disinterested advice of their agent by or at least to the knowledge of the plaintiffs. Is this condition satisfied? I have no doubt that it is. It is, of course, immaterial whether the initiative for the agent's taking an interest of his own came from the agent himself or from the other party to the transaction. It must also be immaterial whether the other party provided it directly or knowingly assisted the agent to obtain it, for example by diverting to himself or an associate a payment intended for his principal. In all the reported cases, the other party has provided it himself and has been fully aware of the agent's personal interest. There is, accordingly, no direct authority on the degree of knowledge which he must possess of the existence of the agent's personal interest. With one reservation to which I shall come in a moment, however, and which goes only to the facts of which knowledge must be proved, I accept the submission made on behalf of the plaintiffs that nothing less than actual knowledge or wilful blindness will suffice. In particular, constructive notice will not do.”
The conflict of interest issues
625.	Accordingly, and once again leaving aside broader questions of the availability of the remedy of rescission, three questions arise. The first is whether Value Partners was subject to a conflict of interest. The second is whether it had been put in this position by, or whether the conflict was known to, UBS. The third is whether the conflict was without the knowledge and consent of KWL.
626.	On the first two of these questions, KWL relies on essentially the same facts as it relies on for the purpose of its agency argument. It contends that agency represents a paradigm case of conflict of interest but that in any event, even if there was no agency, the facts demonstrate that Value Partners was in a position where its duty to KWL and its interest in obtaining further business with UBS were in conflict. On the findings which I have made, in particular that there was an agency relationship between UBS and Value Partners, it is obvious that the first two of the questions identified above must be answered affirmatively. The same is also true if (contrary to my decision above) the facts which I have found are not sufficient to amount in law to a relationship of agency. UBS does not seriously challenge this and expressly accepts that on this issue Mr Bracy’s knowledge would count as the knowledge of UBS. What the position would be if the facts were otherwise, I cannot tell. That would have to depend on what alternative facts were to be found. With that qualification, however, I would hold that there were on any view numerous indications that Value Partners was encouraged and intended to steer lucrative further business in UBS’s direction by exercising the “control” which it claimed to have over its clients. That was sufficient to amount to the kind of “perverse incentive” to conclude the contract regardless of KWL’s interests which will give rise to a conflict of interest (see e.g. Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch) at [218]). Mr Bracy understood this. As already indicated in my discussion of the agency issue, this went well beyond the understandable wish which a bank and a financial adviser might properly have to do further business together if suitable opportunities arise in the future. It was apparent also from the conduct of Value Partners that its aim was to drive the transaction through regardless of KWL’s interests. An example is the way it sought to brush aside the issues which arose in the course of preparation of the Freshfields capacity opinion (see [344] to [351] above). 
627.	Ultimately, the real battleground was over the third question, whether the conflict was without the knowledge and consent of KWL, the issue here being whose knowledge is to be attributed to KWL. UBS contends that the relevant knowledge was that of one or both of KWL’s managing directors, Mr Heininger and Dr Schirmer. Mr Heininger was certainly aware that Value Partners was not providing disinterested or even honest advice to KWL. He was a party to the conspiracy with Value Partners to defraud KWL by siphoning off the greater part of the premium to which KWL was entitled. Dr Schirmer also, according to UBS, although not complicit in or aware of the fraud, was aware of an inappropriate relationship between Value Partners and Mr Heininger, the managing director who was primarily responsible for dealing with the Balaba transaction.
Attribution – the law
628.	Knowledge of a director is in ordinary circumstances treated as the knowledge of the company of which he is a director, but this rule has been held not to apply when the issue is as to the company’s knowledge of wrongdoing by the director himself or in which the director is himself complicit. This exception to the general rule is the Hampshire Land principle (In re Hampshire Land Co [1896] 2 Ch 743). It has been said that to attribute such knowledge to the company would be “contrary to justice and common sense” as it is not to be expected that the director would confess his delinquency to the company (JC Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC1, 19, per Viscount Sumner). The scope of the Hampshire Land principle has been considered in three important recent cases.
629.	Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 was a claim by a company, now in liquidation, against its auditors for negligence, the alleged negligence consisting of the auditors’ failure to detect and prevent dishonest conduct by the company’s sole director in causing it to engage in frauds on banks involving the presentation of sham documents. The damage said to have been suffered as a result of this negligence was the company’s liability to the defrauded banks. In substance, therefore, the company was the perpetrator of the frauds and only a victim of them in an indirect sense. By a majority (Lord Phillips of Worth Matravers, Lord Walker of Gestingthorpe and Lord Brown of Eaton-under-Heywood) the House of Lords held that the claim failed in accordance with the principle of ex turpi causa. 
630.	Lord Phillips held that the case should be decided, without reference to the Hampshire Land principle or any similar principle of attribution, on the ground that the auditors’ duty did not extend to protecting the defrauded banks, for whose benefit as creditors of the company the claim was being brought (see the summary at [18] and [86] of his opinion). Lord Walker and Lord Brown, however, did decide the case by reference to the Hampshire Land principle, holding that it did not apply when the director with the relevant knowledge was also the sole beneficial owner of the company and its directing mind and will, exercising exclusive control over it (“the sole actor exception” -- see in particular [167], [168] and [174] per Lord Walker and [197] to [201] per Lord Brown). In such a case there was no individual connected with the company who could be regarded as an innocent party and no affront to justice or common sense in treating the director’s knowledge as that of the company. In the minority, Lord Scott of Foscote and Lord Mance did not accept the existence of such an exception to the principle. As Lord Walker was subsequently to say in Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue [2014] HKCFA 22 at [100], it is difficult to extract a clear ratio from the speeches of the majority.
631.	Bilta (UK) Ltd v Nazir [2013] EWCA Civ 968, [2014] 1 All ER 168, a decision of the Court of Appeal, was a case of a carousel fraud perpetrated by the company which left it with no assets and a substantial tax liability. In liquidation, the company brought a claim against its two directors, one of whom was its sole shareholder, and others. Some of those others applied to have the claim struck out on the ground of ex turpi causa. Patten LJ, with whom Lord Dyson MR and Rimer LJ agreed, held that the critical question was whether the conduct of the directors was to be attributed to the company, in which case the action was to be regarded as an action between co-conspirators, and that whether the conduct of an agent was to be attributed to a company depended upon the context. He distinguished at [34] and [35] between two categories of case. The first was what he called “the liability cases”, where the issue arose as between the company and the defrauded third party. In such cases the company was not to be treated as a victim of the fraud but as a perpetrator, so that the conduct of the agent was to be treated as the conduct of the company. The second category (described by Lord Walker in Moulin Global Eyecare as “the redress cases”) consisted of cases where the company was seeking compensation from the agent for breach of its duties owed to the company. In such cases the company was to be regarded as the victim of the agent’s conduct and the agent could not defeat the claim by attributing the unlawful conduct for which he was responsible to the company. For this purpose it made no difference whether the unlawful conduct was directed against a third party or against the company itself, or whether the company had other directors or shareholders who were innocent of the fraud. Patten LJ referred at [80] to the need for a “nuanced approach to the question of attribution and not a mechanistic application of a rule regardless of the circumstances and the nature of the claim”. He held that the Court of Appeal was not bound by Stone & Rolls to apply the sole actor exception to a claim by the company for conspiracy against its directors and others. The Hampshire Land principle therefore applied and the action was allowed to proceed.
632.	Most recently, in Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue [2014] HKCFA 22, a decision of the Hong Kong Court of Final Appeal, the majority judgment was given by Lord Walker of Gestingthorpe. After an extensive review of the authorities, he summarised the position as follows at [106]:
“The decision of the Court of Appeal in Bilta has achieved a welcome clarification of the law in this area. The general effect of the authorities discussed above can in my view be summarized in some short propositions. 
(1) Questions of attribution are always sensitive to the factual situation in which they arise, and the language and legislative purpose of any relevant statutory provisions: Tesco at pp 169-170, 194-195, 203; Meridian at pp 507, 511-512; Tesco No 2 at pp 1042-1043; PCW at p 1145; Group Josi at p 1169; Duke at para 615; McNicholas at paras 48-50; Morris at paras 116-124; Safeway at paras 29, 44-46; Bilta at paras 33-35, 45. 
(2) The “directing mind and will” concept in Lennard, although still often referred to in judgments, has been greatly attenuated by recognition of the importance of the factual and legislative context: El Ajou at pp 151, 154, 159; Meridian at pp 507-509 and 511; and numerous later cases. It might be better if it were to fade away as a general concept. 
(3) In some cases acts of directors and employees will be attributed to the corporate employer without their state of mind being so attributed: Duke at para 625, 641; MAN at para 154, illustrated by eg Belmont No 2 at p 398 in juxtaposition with Belmont at pp 261-262.
(4) The underlying rationale of the fraud exception is to avoid the injustice and absurdity of directors or employees relying on their own awareness of their own wrongdoing as a defence to a claim against them by their own corporate employer: Gluckstein v Barnes at pp 247 and 249; Houghton at pp 14 and 19; Belmont at pp 261-262; Beach at para 22.30; Duke at paras 619 to 622; McNicholas at para 56; Morris at para 114; Bilta at paras 36 to 45. 
(5) The exception applies even if the wrongdoing consists of a transaction formally approved by the whole board of directors, and completed under the company seal: Belmont No 2 at p 398. In other words the exception can apply even when the primary rules of attribution are in play. 
(6) But the exception does not apply to protect a company where the issue is whether the company is liable to a third party for the dishonest conduct of a director or employee: El Ajou at p 702 (see para 75 above); Meridian at p 511 (see para 79 above); Duke at para 629; Morris at para 114; Bilta at para 34. 
(7) The supposed distinction between primary and secondary victims, although sometimes a useful analytical tool, is ultimately much less important than the distinction between third party claims against a company for loss to the third party caused by the misconduct of a director or employee, and claims by a company against its director or employee (or an accomplice) for loss to the company caused by the misconduct of that director or employee: Bilta at paras 45 and 77. 
(8) In cases concerned with insurance the terms of the policy are likely to be decisive, especially where a company has obtained cover against the risk of breach of duty, including fraud, by directors or employees: Arab Bank at p 283, and the comments on that case in Morris at paras 122-124. Internal fraud was the “very thing” from which the insurance cover was intended to protect the company.
(9) The fraud exception does not appear to have been even raised as a defence, still less successfully relied on, in a claim by a company against its auditors for failure to detect internal fraud (as in Duke and MAN) with the sole exception of the extreme “one-man” company case of Stone & Rolls (see that case at paras 175 and 176). Again, internal fraud was the “very thing” from which the auditors had a duty to protect the company.
(10) Criminal law cases are of little assistance in determining issues of attribution in civil law cases, because of the reluctance of the court, especially in the earlier cases, to treat offences as carrying strict liability: Odyssey at p 64; Tesco is an example, but Tesco No 2 and Safeway show the more modern approach.”
633.	He added at [113] that Bilta had “clearly demonstrated that the crucial matter of context includes not only the factual and statutory background, but also the nature of the question in which the question arises”, elaborating on this at [131]:
“In the light of Bilta, which goes a long way (but not the whole way) to confirming the views of Professor Watts, the true purpose and limits of the fraud exception have become much clearer. The gradual accretion of learning about primary and secondary victims, with or without additional refinements such as “targeting” or “vehicle of fraud”, can be seen as having missed the point. The crucial distinction depends on the nature of the proceedings in which the issue of attribution arises. On one side there are what Patten LJ (in Bilta, para 34) called the liability cases, such as El Ajou, Meridian, McNicholas and Morris. In them a company is being sued by a third party (which may be an official body) because the company is responsible for dishonest conduct on the part of one or more of its directors or employees. Here the fraud exception does not apply, even if the company is in some sense a victim. On the other side are what may be called the redress cases, such as Gluckstein v Barnes, Belmont, Beach and Bilta itself. In cases of this sort a company is seeking to make its own delinquent director or employee (probably by then an ex-director or ex-employee), or an accomplice of such a person, accountable for the loss that the company has suffered. That is the situation in which the fraud exception applies, because it would be absurd and unjust to permit a fraudulent director or employee to be able to use his own serious breach of duty to his corporate employer as a defence.”
634.	He recognised, however, that there would be cases which did not fit neatly into this categorisation of “liability” and “redress” cases. 
635.	Bilta is currently under appeal to the Supreme Court, but meanwhile the decision of the Court of Appeal is binding upon me. Moulin Global Eyecare is not binding, but its reasoning is powerful and strongly persuasive. 
Attribution – the principles applied
636.	UBS relies on the cases cited above as demonstrating that, properly understood, the Hampshire Land principle as an exception to the general rule that the knowledge of a director is to be treated as the knowledge of the company must be confined to the “redress” cases and that, as this is not such a case, the knowledge of Mr Heininger and Dr Schirmer must be treated as the knowledge of KWL. I would accept that, whether or not Mr Heininger knew of any arrangement between UBS and Value Partners relating to other business, as a participant in the conspiracy to defraud KWL clearly he knew that Value Partners was not providing disinterested advice to KWL. If his knowledge is to be attributed to KWL, the “conflict of interest” defence must therefore fail on the ground that KWL knew of and consented to the breach by Value Partners of the duties which it owed to KWL. 
637.	In my judgment, however, the idea that KWL consented (or must be treated as having consented) to being defrauded by its managing director and financial adviser is absurd. To hold that the analysis in Bilta and Moulin Global Eyecare requires such a conclusion would be to fall into the trap of adopting “a mechanistic application of a rule regardless of the circumstances and the nature of the claim” against which Patten LJ warned in Bilta. In fact, however, those cases do not require such a conclusion. As they demonstrate, identification of the issue and the context in which it arises, including the nature of the proceedings, is critical in resolving questions of attribution.
638.	True it is that this is not a “redress” case in which KWL is seeking redress from Mr Heininger for the consequences of his fraud, but it is not a “liability” case either. UBS is not seeking to hold KWL liable for the fraud committed by Mr Heininger and Value Partners so as to give rise to a question whether their conduct must be treated as KWL’s. 
639.	The analysis in Bilta and Moulin Global Eyecare was concerned with the circumstances in which a director’s conduct should be attributed to the company. But the issue here is not whether Mr Heininger’s misconduct should be attributed to KWL so as to make his actions in law the actions of KWL. Indeed, to hold that it should would mean that in law there was no misconduct, since Mr Heininger’s only victim was KWL and a company cannot defraud itself. That would be an absurd conclusion. Rather the issue is whether Mr Heininger’s knowledge of his misconduct with Value Partners, which naturally he concealed from KWL, should nevertheless be attributed to KWL. The context in which that issue arises is for the purpose of determining whether KWL gave its informed consent after full disclosure (as Lord Neuberger put it in FHR European Ventures at [5]) to the breach of duty by Value Partners which resulted in the loss of the greater part of the premium to which it was entitled. In my judgment it is clear that it did not. There is no principle of attribution which requires me to hold that a company is deemed to know of and consent to a conspiracy to defraud it hatched between a director and an agent of the company. Accordingly I hold that for the purpose of the “conflict of interest” issue, UBS cannot rely on the knowledge of Mr Heininger.
640.	The position of Dr Schirmer is different. UBS does not suggest that he was a party to or aware of the conspiracy to siphon off the premium (indeed, he was under the impression that there was no upfront premium: see [236] above), or that he was aware of the close relationship between UBS and Value Partners, but it does contend that he was aware that the relationship between Value Partners and Mr Heininger was inappropriate as a result of the generous gifts and benefits provided to Mr Heininger, such that he knew or must be taken to have known that Value Partners was not providing disinterested advice to KWL. This submission fails on the facts. Logicrose makes clear that only the principal’s actual knowledge of and consent to the agent’s conflict of interest will deprive the principal of a remedy. As already indicated I am not persuaded that Dr Schirmer in fact appreciated the impropriety of the relationship with Value Partners before September 2006, even if he ought to have done so (see [105] above). No case is advanced by UBS on the basis that KWL lost its right to complain of a conflict of interest as a result of Dr Schirmer’s belated recognition at or after that time of an inappropriate relationship with Mr Heininger and (for the avoidance of doubt) it is too late for any case to be advanced now. (Indeed UBS’s case on attribution was only advanced for the first time in the course of closing submissions. While I have addressed that case on its merits, it would be wrong to speculate on other ways in which it might have been put which have not been tested in evidence). Moreover, knowledge that there was something inappropriate about Mr Heininger’s relationship with Value Partners would hardly count as “full disclosure” of the conflict of interest to which Value Partners was subject, as required by Millett J in Logicrose and Lord Neuberger in FHR European Ventures.
641.	I conclude, therefore, that subject to the question of remedy, KWL’s conflict of interest defence succeeds.
FRAUDULENT MISREPRESENTATION
642.	KWL’s final defence to UBS’s claim for payment of the sum due under the Balaba STCDO is that it was induced to enter into that STCDO by misrepresentations made on behalf of UBS in the course of the negotiations. In the course of the trial KWL abandoned any case based on negligent or innocent misrepresentation and confined its case to fraud. It is therefore unnecessary to consider whether documents such as the Engagement Letter or the Risk Disclosure letter give rise to any contractual estoppel (cf. cases such as Peekay Intermark Ltd v Australia & New Zealand Banking Group Ltd [2006] EWCA Civ 386, [2006] 2 Lloyd’s Rep 511 and Springwell Navigation Corp v JP Morgan Chase Bank [2010] EWCA Civ 1221, [2010] 2 CLC 705). It is common ground that no such estoppel would arise if fraudulent misrepresentations were made.
The representations
643.	By the close of the trial KWL relied on four alleged misrepresentations:
a.	first, that the transaction was virtually risk free for KWL because the risk of default arising under the STCDOs was virtually zero;
b.	second, that the net effect of each of the STCDO transactions was to reduce through diversification the risk of suffering significant losses to which KWL was exposed when compared with the risk of suffering significant losses to which it was exposed as a result of the long-term bonds;
c.	third, that the risk of default was indicated by the STCDO’s credit ratings and that UBS (a) was not itself using a different measure of risk that produced a different result and/or (b) had no reason to believe that the tranches carried a greater risk of default than was implied by their credit ratings; and
d.	fourth, that the risks associated with the STCDOs had been communicated to KWL (and/or to Value Partners) in a way that was clear, fair and not misleading.
644.	To some extent these representations, if made, are representations of opinion rather than fact. However, where a representation involves a matter of opinion or judgment, the representor may be taken to represent that he actually holds the opinion represented or that there are reasonable grounds for doing so: Chitty on Contracts (31st Edn, 2012), Vol 1, paras 6-008 and 6-009. KWL contends that to the extent that any of these representations comprise representations of opinion or judgment rather than fact, they amount to representations by the individuals at UBS who made them that they actually held the relevant opinions and had a reasonable basis for holding them. In principle I would accept this so far as relevant, save that in the context of a case now confined to fraud, KWL would need to show that the opinions were not honestly held and not merely that the individuals concerned had no reasonable basis for holding them. 
645.	It seems to me that there is a degree of tension between the first three representations relied on by KWL, while the fourth (as KWL accepts) adds little or nothing because the respects in which UBS’s communication of the risks is alleged to have been misleading is by reason of the first three representations. The first representation is that the transaction would be virtually risk free for KWL, whereas the second and third representations appear to acknowledge that there would in fact be some risk. The second representation is to the effect that KWL’s overall risk would be reduced as a result of the STCDOs, while the third representation is to the effect that the risk of default was fairly represented by the credit ratings. But as KWL was at pains to emphasise, the credit ratings themselves demonstrated that the effect of the STCDOs was to increase and not to reduce KWL’s overall risk (see the table at [145] above). It is therefore very difficult to see how all of these representations could have been made by UBS and could have influenced KWL in its decision whether to enter into the STCDOs. So if a representation was made which had some influence on KWL’s decision making, which was it – (a) that the transaction involved virtually zero risk, (b) that KWL would be subject to some albeit reduced risk, or (c) that even though the credit ratings showed that the risk would be increased, nevertheless that did not fairly characterise the position as another way of measuring the risk showed that the increase in risk would be even greater? While it is open to a litigating party to advance different and even mutually contradictory cases in the alternative, a party who chooses to do so runs the risk that they may detract from each other. When the alternative cases involve allegations of fraud, that risk applies with particular force.
Fraudulent misrepresentation – the law
646.	The elements of a claim in deceit are well established. For present purposes it is sufficient to take the succinct summary of the relevant requirements by Rix LJ in The Kriti Palm [2006] EWCA Civ 1601, [2007] 1 Lloyd's Rep 555 at [251]: 
"The elements of the tort of deceit are well known. In essence they require (1) a representation, which is (2) false, (3) dishonestly made, and (4) intended to be relied on and in fact relied on."
647.	There is a rebuttable presumption, in a fraud case, that a defendant to whom a fraudulent misrepresentation is made was induced by that representation (in the sense that the representation played a part in the decision) to enter into the contract in question. In Dadourian Group International Inc v Simms [2009] EWCA Civ 169, [2009] 1 Lloyd’s Rep 601 at [99] and [100] the Court of Appeal approved the following propositions:
“… (2) if the representation is of such a nature that it would be likely to play a part in the decision of a reasonable person to enter into a transaction it will be presumed that it did so unless the representor satisfies the court to the contrary …; … 
(4) the presumption of inducement is rebutted by the representor showing that the misrepresentation did not play a real and substantial part in the representee's decision to enter into the transaction; the representor does not have to go so far as to show that the misrepresentation played no part at all; …”
648.	I deal below with each alleged misrepresentation in turn. In the light of my findings of facts in the detailed narrative section of this judgment I can do so fairly briefly.
“Virtually risk free”
649.	The first representation on which KWL relies was to the effect that the transaction was virtually risk free for KWL because the risk of default arising under the STCDOs was virtually zero. This is alleged to have been expressly represented to Mr Heininger and Dr Schirmer by Mr Sanz-Paris and Mr Czekalowski at the meeting on 9 May 2006 (see [228] to [240] above).
650.	I am satisfied that no such representation was made. There is simply no evidence of any such representation, let alone evidence which would make good a case of fraud. 
651.	All of the UBS witnesses who were asked about the 9 May 2006 meeting denied that such a representation was made and I accept their evidence that it is inherently unlikely that Mr Sanz-Paris or Mr Czekalowski would have said this or anything along these lines. UBS’s presentation at the meeting did refer to the “super senior” tranche as being suitable for investors who required “almost no risk”, but such a tranche was illustrated as having an attachment point of 12% and was contrasted with (a) an AAA rated senior tranche between 6% and 12% for investors requiring “very low risk”, (b) an AA rated mezzanine tranche between 3% (or 4%) and 6% which is what KWL was then considering and (c) an equity tranche bearing losses up to the attachment point of the mezzanine tranche which was described as a high risk investment suitable for speculators and hedge funds. To have described the mezzanine tranche as having “virtually zero” risk in the context of these examples would therefore have been incoherent. Mr Sanz-Paris said that it was possible that he said that it would take an economic catastrophe for the transaction to produce a loss for KWL but, if he did say that, it was in substance true.
652.	Mr Heininger did not give evidence in this trial, but he has given extensive evidence in the proceedings against him in Germany. I was not referred to any suggestion by him that a representation was made by UBS at the 9 May 2006 meeting that the transaction would be risk free, although that is a point which he might have been expected to make if such a statement had been made by UBS. It is abundantly clear from the documents related at length in the detailed narrative section of this  judgment that he understood perfectly well that the transaction did involve risks for KWL and that he was content for KWL to undertake those risks. His attitude, which was not derived from anything said by UBS, appears to have been that so long as the STCDO had a credit rating which was higher than KWL’s own shadow rating, that represented an acceptable risk. Mr Heininger understood in particular that it was only by accepting a level of risk that the transaction would generate the premium which he and Value Partners proposed to siphon off, away from KWL. 
653.	Dr Schirmer did give evidence about the 9 May 2006 meeting, but his evidence about it was hopelessly confused and, as I find, bore little resemblance to what was actually said. That may have been because Mr Heininger’s occasional summaries in German of the discussion which had taken place in English were deliberately misleading or it may have been because Dr Schirmer was way out of his depth in discussing financial matters and failed to understand what he was being told. The closest his evidence came to a suggestion that a representation that the transaction would be risk free for KWL had been made at this meeting was his understanding that UBS would bear the risk of the portfolio losing its value, so that the only risk for KWL would be the insolvency of UBS. It is obvious, however, that nothing of this kind was actually said by UBS. Dr Schirmer was asked several times in cross examination whether UBS had said at the 9 May 2006 meeting that the transaction would be risk free. His final position was that he was unable to say that it had:
“LORD FALCONER: It's right, is it not, that at no stage during the course of the presentation did anybody on behalf of UBS say that this was a risk-free transaction?
A. I cannot make a judgment on that.
Q. It's right, is it not, that Mr Heininger never told you it was a risk-free transaction at this meeting?
A. I can't recall that with any degree of certainty, that the transaction was risk-free. He let me know that, but I'm not sure whether this happened on 9th May.”
654.	KWL’s case as to the first of the alleged representations therefore fails at the first hurdle.
655.	I would add that if UBS had made such a representation, it would have known that it was untrue. However, I would have found in the light of the documents showing Mr Heininger’s understanding just referred to that UBS had rebutted the presumption of inducement referred to in the Dadourian case. But the better analysis is that no such representation was made.
“Reduction of risk through diversification”
656.	The second representation relied on is that the net effect of each of the STCDO transactions was to reduce through diversification the risk of suffering significant losses to which KWL was exposed when compared with the risk of suffering significant losses to which it was exposed as a result of the long-term bonds. This is alleged to have been expressly or impliedly represented in two ways:
a.	by Mr Sanz-Paris and Mr Czekalowski at the meeting on 9 May 2006;
b.	in Mr Kraus’s German language presentation of 15 May 2006, entitled (in translation) “Cross-Border Leases: Restructuring Considerations”, which opened with the statement that “The restructuring project described in the following is to fulfil several risk-minimising objectives for KWL”. 
657.	KWL contends also that there was an implied (but not express) representation to this effect: 
a.	by Mr Bracy’s email of 29 May 2006 setting out what Mr Heininger should say about the transaction to the UBS credit committee in particular as to the purpose of the transaction being “risk diversification”;
b.	by the references to diversification throughout the presentation materials supplied by UBS; and
c.	by what it described as UBS’s decision to press ahead with the transaction when it had been made clear to it that KWL could only proceed if the transaction would reduce credit risk. 
658.	KWL relies also on evidence from UBS witnesses who accepted in cross examination that the transaction was sold to KWL as a transaction which would reduce risk.
659.	Here too I find that no representation to the effect alleged was ever made, either expressly or by implication. 
660.	As for the 9 May 2006 meeting, the UBS presentation gave equal prominence to the twin objectives of diversification and yield enhancement, explaining that there was a balance to be struck between “high credit quality” and “upfront cash benefits” depending on “KWL’s risk/reward appetites”. At this stage the way in which this balance was to be struck had not yet been decided, and it would therefore not have made sense for UBS to make any representation comparing the overall risk with KWL’s existing arrangements. Nor did it do so. Indeed the example discussed at the meeting was of an AA rated tranche, but almost immediately afterwards Value Partners made clear that KWL was content to opt for a lower rated A tranche in order to maximise the premium which it would receive. The presentation did refer to “diversification” (the point of which is generally to reduce risk by spreading it) and to “reducing single event credit risk”, but went on to specify that what was being reduced by diversification was “unsystematic risk”, that is to say the risk of losses occurring as a result of features specific to any one company as distinct from features of the economy or a sector of the economy as a whole. It did not say that entry into an STCDO would reduce KWL’s overall risk, but made clear that whether this would happen would depend on various matters, including principally “KWL’s risk/reward appetites”. 
661.	Unless the representation relied on can be found in the UBS presentation, which in my judgment it cannot, there is no evidence that any such representation was made at the 9 May 2006 meeting for the reasons already given in relation to the first representation relied on by KWL. Even if it had been, any such representation must have been by reference to the transaction then under discussion and could not sensibly have been taken to refer to the higher risk A rated transaction which KWL indicated immediately after the meeting that it wished to pursue.
662.	Mr Kraus’s German language presentation (see [243] and [244] above) was never forwarded to KWL and therefore cannot have constituted a representation made to KWL. It was sent to Value Partners and is therefore capable of constituting a representation made to Value Partners in its capacity as agent of KWL. However, while it contained language referring to minimisation of risk, it was in my judgment far too general to constitute a representation that the overall effect of the particular transaction then under consideration but whose final form had not yet been determined would reduce KWL’s overall risk.
663.	As for the matters relied on as constituting an implied representation that risk would be reduced:
a.	Mr Bracy’s email of 29 May 2006 was, and in my judgment was understood to be, essentially a script for Mr Heininger, telling him what to say in order to convince CRC to approve the proposed transaction (see [288] and [289] above). It was not a representation as to the actual effect of the transaction at all. In any event the e-mail did acknowledge (or suggested that Mr Heininger should acknowledge) that the STCDO involved a “very limited” but nevertheless “acceptable” risk.
b.	I accept that UBS’s presentation materials contained numerous references to diversification, although generally to diversification of unsystematic risk, and that the concept of diversification implies a reduction in risk. However, in considering whether there was an implied representation as alleged, the statements made by UBS must be considered as a whole. Taking them as a whole and in context, it is clear that from the very beginning UBS made clear to KWL the relationship between risk and return, and the fact that KWL had a choice to make, so that the higher the premium, the greater the risk which KWL would have to undertake. It is clear too that UBS repeatedly described the risk by reference to the credit rating which the STCDO would be able to achieve. It was therefore always possible for a comparison to be made between the proposed STCDO rating and the rating of the existing single name bonds. That comparison would demonstrate, at any rate once KWL settled on the rating which it would accept, that the STCDO involved a lower rating and therefore higher risk than the single name bonds. For example, Mr Sanz-Paris’s email of 19 May 2006 (see [245] above) spelled out in terms that the Balaba transaction would not necessarily result in an overall reduction of risk. Dr Schirmer effectively accepted this, saying that if he had understood that what was being discussed at the 9 May 2006 meeting was an AA rated STCDO, he would have understood that this was more risky that the AAA rated single name bonds. This is fatal to the implication of the representation on which KWL relies as (even if Dr Schirmer did not realise this) that is what was being discussed.
c.	KWL relies also on what it described as UBS’s decision to press ahead with the transaction when it had been made clear to it that KWL could only proceed if the transaction would reduce credit risk. It is not altogether clear to what KWL is referring here, but I assume it to be the fact that the initial draft of the Freshfields capacity opinion contained, in assumption (k), an assumption that the transaction would be entered into by KWL to reduce its existing risk exposure (see [338] above). However, it was for Freshfields to determine whether this assumption was indeed critical to the question whether KWL could proceed with the transaction. After considering the matter further they decided to remove the assumption from the final version of the opinion. I can see no basis here for any implication of a representation that the transaction would in fact reduce KWL’s overall risk. 
664.	The very general evidence from several UBS witnesses who accepted in cross examination that the transaction was sold to KWL as a transaction which would reduce risk is a tribute to the skill of Mr Lord’s cross-examination but, as I have already observed at [246] above, I do not accept this as an accurate description of what occurred.
665.	I find, therefore, that the representation alleged was not made. Moreover, this is an allegedly fraudulent representation alleged by KWL to have been made for the most part as a matter of implication. If contrary to my view, such a representation is to be implied from the matters to which I have referred, I do not accept that those making that implied representation on behalf of UBS intended to do so. 
666.	In any event, even if such a representation had been made, either at the 9 May 2006 meeting or in any of the other ways on which KWL relies, there is no evidence (or at any rate none that I accept) that KWL was conscious of any such representation having been made to it, that it relied upon such a representation or that the representation played any part in KWL’s decision to enter into the STCDO. Whenever it was presented with a choice between lower risk and higher premium, KWL invariably elected to take the money. I see no reason to doubt that Mr Heininger fully understood the risks involved and understood likewise that the effect of the transaction was to increase the risks to which KWL was exposed. I find that he was prepared to run those risks, which he regarded as acceptable, in order to benefit personally from the bribe which he was to receive. For this purpose he was the relevant decision maker. There is nothing in Dr Schirmer’s evidence, and certainly no evidence which I accept, to suggest that he was ever conscious of the representation which KWL claims to have been made, apart perhaps from his unimpressive evidence about the 9 May 2006 meeting with which I have already dealt. Moreover, to the extent that the position of Value Partners as the only recipient of Mr Kraus’s German language presentation is relevant, there is no reason to suppose that Value Partners ever believed that the effect of the transaction was to reduce KWL’s overall risk. The strong probability is that Value Partners understood the transaction perfectly well and that all it cared about was getting its hands on as much of the premium as possible. Once again, therefore, I would if necessary have found that UBS had rebutted the presumption of inducement.
667.	For all these reasons, therefore, KWL’s case as to the risk reduction representation fails.
“Risk of default indicated by credit ratings”
668.	The third representation on which KWL relies was to the effect that the risk of default was indicated by the credit ratings and UBS (a) was not itself using a different measure of risk that produced a different result and/or (b) had no reason to believe that the tranches carried a greater risk of default than was implied by their credit ratings. KWL says that this was impliedly represented by (a) a statement allegedly made by Mr Sanz-Paris and Mr Czekalowski at the 9 May 2006 meeting that the credit rating represented the probability of default, and (b) statements in the illustrative presentations sent to Value Partners by Mr Bracy on 10 April 2006 that “Rating serves as proxy for credit risk” and referring to the risk of default associated with investments with certain ratings over time.
669.	This is a rather complicated representation, which requires some further explanation. KWL’s case is that the meaning which these statements would convey to a reasonable recipient was that UBS’s own assessment of risk of loss to KWL was as implied by the credit ratings. However, KWL contends that although this was one way of assessing the risk of loss, UBS was in fact using a different method, namely the “market-implied” probability of default, which can be derived from credit default swap spreads by means of complex financial modelling, and which showed a higher risk (cf. the comparison of spreads in the table at [152] above, although as indicated at [151] a simple comparison of the spreads is not appropriate). It was this modelling which was used in order to derive the premium for the STCDO. KWL’s case is that in presenting the ratings-implied risk without also presenting the market-implied risk, UBS impliedly represented that there was no other measure of which it was aware that produced a different and significantly worse default probability of default.
670.	What the UBS presentation at the 9 May 2006 meeting actually said on this topic was that:
“The tranche would be rated AA as rating agencies assess that the probability of incurring 4% or more losses in the portfolio is very low, and commensurate to a AA rating investment.”
671.	This was true. It was a statement about the approach of the rating agencies which said nothing about whether other methods of assessing risk were available or what they might show. I am not prepared to find that Mr Sanz-Paris (or Mr Czekalowski, if he was present) went further orally than what is said in the written presentation.
672.	The presentations sent to Value Partners by Mr Bracy on 10 April 2006 were no more than illustrations for Value Partners’ benefit of what STCDOs were and how they worked (see [178] above). They were not directed to any particular transaction. But in any event the passages on which KWL relies say nothing about whether there were other ways, such as spreads, of measuring the risks involved in a CDO.
673.	However, if contrary to my view the matters relied on by KWL do amount to the making of this particular representation, this too is a representation said to have been made as a matter of implication rather than expressly. I do not accept that Mr Czekalowski (if he was present) or Mr Sanz-Paris intended to make such a representation at the 9 May 2006 meeting or intended to mislead KWL in this regard. Nor did Mr Bracy intend to make any such representation when he sent the illustrative materials to Value Partners on 10 April 2006.
674.	Again, I would if necessary have found that UBS had rebutted the presumption of inducement. Mr Heininger for his own reasons was very keen to conclude this transaction and it is most unlikely that he would have been deterred by the knowledge that there were other ways of measuring the risk which showed a higher risk position than the credit rating.
“Clear, fair and not misleading”
675.	The fourth representation relied upon is that the risks associated with the STCDOs had been communicated to KWL (and/or to Value Partners) in a way that was clear, fair and not misleading. This is said to be an implied representation as a result of the statement in the STCDOs that UBS was authorised and regulated in the UK by (what was then) the Financial Services Authority, which imposes a requirement that authorised firms market their products to customers in a way that is clear, fair and not misleading.
676.	There was some debate whether a representation that marketing has been conducted in a way that is clear, fair and not misleading is to be implied by virtue of the fact that the entity marketing the product is stated to be regulated by the FSA (now the Financial Conduct Authority), but it is unnecessary to resolve that issue. The only respects in which this transaction was alleged to have been marketed by UBS in an unfair or misleading way formed the subject of the first three representations dealt with above and (perhaps) the other defences on which KWL relies. If KWL succeeds on those issues, its reliance on this fourth representation adds nothing, while if it fails on those issues its reliance on this somewhat artificial misrepresentation case will not assist it. In the end KWL accepted that this way of putting its case did not add very much. On the facts of this case, I do not think it adds anything. I would prefer to leave the debate referred to above to be decided in a case where the relevant unclear, unfair or misleading conduct does not form the subject matter of an independent claim or defence. In any event there was no evidence at all that the statement that UBS was regulated by the FSA formed any part of KWL’s thinking in deciding to enter into the STCDO or that Mr Heininger or Dr Schirmer ever pondered the implications of such a statement. This seems highly unlikely to have happened. 
UBS’S CLAIMS FOR BREACH OF WARRANTY AND MISREPRESENTATION
677.	In the alternative to its primary claim to recover the sum due pursuant to the Balaba STCDO, UBS seeks to recover an equivalent sum as damages for breach of warranty and for fraudulent misrepresentation by Mr Heininger on behalf of KWL. It is convenient to consider this claim at this point, before dealing with the issue of what remedy is available to KWL as a result of the conclusions reached above as to its four grounds of defence to UBS’s claim to enforce the Balaba STCDO.
678.	In this regard UBS relies on three statements made by Mr Heininger at the due diligence meeting on 30 May 2006 (see [291] above) and on statements made in the Engagement Letter ([269] to [271]) and the Risk Disclosure Letter ([272] to [275]).
679.	The statements made at the 30 May 2006 meeting were to the effect that:
a.	KWL's rationale for the transaction was that "CDS will help diversify credit risks and CDO is a diversified portfolio which will increase yields"; 
b.	"No further [internal KWL] approvals for the transaction were required”, that it was Mr Heininger’s belief “that under the approvals obtained for X-Border Leases some years ago the CEO has sufficient authority to transact credit derivatives”, and that KWL had “an opinion from Freshfields which reiterates this"; and 
c.	KWL had sought independent advice from Freshfields and Value Partners in order fully to understand the risks and mitigants of CDO swaps.
680.	These statements are recorded in the minutes of the meeting and I accept that they were made. The first statement was untrue. To the extent that KWL had a legitimate rationale for the transaction it was to raise money, the rationale of which Dr Schirmer was aware, although he was under a false impression as to the upfront nature of the premium, in part at least because Mr Heininger and Value Partners, with the UBS deal team’s assistance, did their best to ensure that he did not find out about the existence or amount of the premium. But Mr Heininger’s real motivation, of course, was the fraudulent scheme with Value Partners to siphon off the greater part of the premium for his and Messrs Senf and Blatz’s own personal benefit. Mr Heininger knew that this statement was untrue, and that he was deceiving the CRC by making it, but so too did UBS in the person of Mr Bracy who knew that the rationale for the transaction was to generate cash, even though he did not know about the fraudulent scheme. Indeed, this was the false line which Mr Bracy had told Mr Heininger to take at the meeting in order to ensure that the transaction was approved.
681.	In the light of my decision on the issue of evident abuse, the first part of the second statement was substantially true – as a matter of German law no further internal KWL approvals for the transaction were required in order for KWL to be bound by the signature of Mr Heininger and Dr Schirmer, even if KWL’s Articles did require Supervisory Board approval of the contract. It was not true, as Mr Heininger must have known, that KWL had an opinion from Freshfields which confirmed this. The opinion provided to KWL by Freshfields was much more equivocal (see [333] above). However, my decision on the issue of evident abuse means that UBS has not been prejudiced by any falsity of this statement.
682.	The third statement, that KWL had sought independent advice from Freshfields and Value Partners, was also untrue, at least as regards Value Partners. Mr Heininger knew this, but was saying what Mr Bracy had told him to say. However, my decision on the misrepresentation issue means that UBS has not been prejudiced by the falsity of this statement either.
683.	The statements contained in the Engagement Letter were those set out at [270] above, namely (in summary) that:
a.	“This Agreement” (i.e. the Engagement Letter itself) had been duly and validly authorised and executed by or on behalf of KWL; 
b.	KWL was a sophisticated party with sufficient expertise to evaluate the risks and merits of any structure developed in connection with the transaction, which had engaged or would engage competent professional advisors to advise it on the risks of the transaction; and
c.	KWL would not rely on any communication by UBS as investment advice or as a recommendation to enter into any transaction.
684.	It was not true that KWL had engaged or would engage competent (or at any rate honest) financial advisers. Mr Heininger had no intention of doing so but, as I have found, there is no reason to doubt that he understood the risks of the transaction. Otherwise, however, these representations were for the most part substantially true. Whether or not KWL was to be regarded as a sophisticated party (an opinion which Ms Short of CRC never held: see [298] above), Mr Heininger did not rely on investment advice from UBS, but made his own evaluation, which was that the increased risk which the STCDO represented was acceptable in order to enable the fulfilment of his nefarious purposes.
685.	The statements in the Risk Disclosure Letter on which UBS relies were to the effect that:
a.	KWL was entering into the transaction in good faith and in accordance with its normal business activity;
b.	The STCDO transaction was properly authorised with all necessary consents having been given;
c.	KWL had discussed the transaction with its auditors; and
d.	KWL was not relying on UBS’s presentations as investment advice.
686.	To some extent these repeat statements already discussed above. To the extent that they do not, Mr Heininger knew that KWL was not entering into the transaction in good faith and in accordance with its normal business activity, but pursuant to his criminal conspiracy with Value Partners, and he knew too that there had been and would be no discussion with KWL’s auditors.  
687.	UBS’s case is that these various statements played an important part in its assessment of the transaction and that if they had not been made it would not have proceeded with the transaction. As a result it claims damages from KWL and in addition invokes the “unclean hands” principle to the extent that KWL seeks equitable relief in the form of rescission. The damages which UBS claims consist of the losses suffered by it on the hedges which it took out in the market at the time of the transaction. Although there was no exploration at the trial of the precise amount which would be recoverable on this basis, I understand that disclosure of the relevant hedging documents was provided and I accept that the sum would be broadly equivalent to the sum payable under the STCDO, albeit that a precise calculation may be somewhat complex. If necessary, there would have to be an inquiry as to the precise figure, with credit being given (as UBS accepted) for the sum payable to KWL pursuant to the GECC, MBIA and Merrill Lynch single name CDSs.
688.	As already indicated, I accept that at least some of the statements on which UBS relies were untrue and that Mr Heininger knew this. While some of these falsehoods were also known by Mr Bracy to be false, at least one was not, namely the statement that KWL was entering into the transaction in good faith and in accordance with its normal business activity. I accept that Mr Bracy did not know about the bribe to be paid to Mr Heininger albeit that he did know, at least in general terms, that Messrs Senf and Blatz were not honest financial advisers but were prepared to abuse their trusted position as advisers to clients such as KWL.
689.	The question then arises whether UBS is entitled to recover as damages for breach of warranty or for fraud the sum which it has lost on the contracts which it entered into in order to hedge the Balaba STCDO and the other STCDOs. In my judgment it is not. 
690.	Damages for breach of warranty would typically be assessed in accordance with the contractual measure of damages. The object of such an assessment would be to put UBS as the innocent party in the position in which it would have been if the warranty had been true. But in that event, that is to say if KWL had been acting in good faith and in the normal course of its business, and if all the other statements had been true, the transaction would have gone ahead and UBS would have entered into precisely the same hedges as it did in fact enter into. However, it would remain the case that Value Partners, for this purpose to be regarded as the agent of UBS, had paid a bribe to Mr Heininger, and that to the knowledge of UBS (in the person of Mr Bracy) Value Partners was not providing disinterested advice to KWL. Accordingly, subject to the “unclean hands” issue, the transaction would still have been voidable and would have been avoided by KWL, leaving UBS unable to recover under the STCDO and facing the same hedging losses as it has in fact faced. 
691.	Perhaps as a result of this difficulty, UBS seeks to rely not on the contractual but on the tortious measure of damages for fraud, putting the innocent party in the same position as if the representation in question had not been made. It contends that without the good faith warranty it would never have entered into the transaction at all and would not, therefore, have suffered the hedging losses which it has suffered. I accept that if KWL had refused to sign (for example) the Risk Disclosure Letter containing the good faith warranty, that would have constituted a red flag for UBS, and it is unlikely that the transaction would have been concluded. I accept also that Mr Heininger who signed the letter knew that KWL was not entering into the transaction in good faith and knew also that if he had refused to sign, UBS would have been unlikely to proceed further. Thus he intended UBS to rely on the statements in the letter, which he recognised as a letter of some importance. In this respect, as in other statements that he made, he was acting dishonestly. 
692.	However, I accept KWL’s submission that the loss suffered by UBS on its hedging contracts was not caused by its entry into the Balaba STCDO. The real and effective cause of the loss was not that UBS entered into its hedging contracts or even that it entered into the Balaba STCDO. Rather it was that the Balaba STCDO is unenforceable by UBS as a result of matters for which UBS is responsible -- the bribery of Mr Heininger by UBS’s agent Value Partners and/or its knowledge of the conflict of interest to which Value Partners was subject. Accordingly its claim for damages fails as a matter of causation. A similar analysis applies to the hedging contracts concluded by UBS in order to generate the premium and profit required for the LBBW and Depfa transactions. If those Back Swaps are valid and enforceable, UBS will have suffered no loss. If they have been rescinded for misrepresentation by UBS, an issue addressed below, it is UBS's own misrepresentation which is the cause of its loss on those hedging contracts.
693.	This is in my view a sensible result. As KWL submitted, if its case on bribery by an agent of UBS and/or conflict of interest to UBS’s knowledge is correct, as I have held that it is, it would be surprising if UBS could somehow recycle its claims by reliance on what are essentially ancillary warranties and representations by KWL. Indeed, the due diligence meeting, the Engagement Letter and the Risk Disclosure Letter are in substance aspects of the Balaba transaction which by reason of the bribery and conflict of interest must be viewed as a tainted transaction. If the transaction can be avoided on those grounds, it is hard to see what independent validity could remain for the Engagement Letter and the Risk Disclosure Letter. They form part of the transaction documents into which KWL was induced to enter. If KWL is entitled to rescind the STCDO transactions then these letters will likewise be avoided. In this respect the position is different from that considered by Andrew Smith J in Credit Suisse International v Stichting Vestia Groep [2014] EWHC 310 (Comm), a judgment delivered after conclusion of the argument in this case. He held that certain of the derivatives in issue in that case were void for want of capacity on the part of the Dutch social housing association which had purported to conclude them. However, it was not disputed that the association did have capacity to make various representations and warranties contained in the ISDA Master Agreement and in a Management Certificate. Andrew Smith J referred to previous authority to the effect that an entity cannot expand its capacity by estoppel or contract, but held that the claimant bank was entitled to rely on a representation and warranty that the transactions in question were in compliance with the association’s articles of association (see [287] to [322] of his judgment). The issues raised by that decision do not arise here. If the STCDO itself is voidable by reason of bribery and/or conflict of interest, the representations and warranties in these ancillary documents can have no independent life.
694.	In particular the bribery of Mr Heininger, for which I have found that UBS was responsible in law, was intended to induce him to do whatever was necessary for the transaction as a whole to be concluded. That included telling lies at the due diligence meeting and signing the Engagement Letter and the Risk Disclosure Letter. A party whose agent bribes the managing director of its proposed counterparty should not be very surprised to find that the same man has lied to it in the course of negotiating the transaction in question. Similarly, if UBS knew that KWL was not being properly advised as to entry into the STCDO itself, it cannot have thought that it was receiving proper advice about ancillary agreements such as the Engagement Letter and the Risk Disclosure letter.
695.	Indeed, although there was in this case an express warranty of good faith, in many such transactions it will be implicit, and will go without saying, that the parties are acting in good faith. To hold that the consequences of avoidance of a transaction for bribery or because of a party’s knowledge of an agent’s conflict of interest can themselves be avoided by reliance on a warranty of good faith could lead to serious inroads into important equitable principles which are intended to promote good faith in business dealings.
696.	I conclude, therefore, that just as UBS cannot enforce the STCDO itself because of the bribery of Mr Heininger by Value Partners (acting for this purpose as UBS’s agent) and because of its knowledge of the Value Partners’ conflict of interest which UBS itself had created, so too it cannot rely on the false statements made by or on behalf of KWL at the due diligence meeting and in the Engagement Letter and Risk Disclosure letter to recover damages, the broad effect of which would be to enable it to escape from the invalidity of the STCDO.
BRIBERY AND CONFLICT OF INTEREST – REMEDY
Rescission of the Balaba STCDO
697.	For the reasons given above KWL’s defences based on bribery and conflict of interest succeed, while its defences based on evident abuse and misrepresentation fail. UBS’s claims for damages for fraud also fail. In those circumstances KWL is prima facie entitled to rescission of the Balaba STCDO. UBS submits, however, that rescission is an equitable remedy which should be refused on two related grounds. The first is that having regard to what UBS describes as “the bigger picture”, rescission would be an unfair and disproportionate remedy. The second is that rescission would infringe the maxim that “he who comes to equity must come with clean hands”.
698.	Broadly speaking the “bigger picture” on which UBS relies is that the real reason why this disastrous transaction took place was the corrupt relationship between Mr Heininger and Value Partners, of which Dr Schirmer had knowledge, not in the sense that he knew the detail of that relationship, but in the sense that he knew that the relationship was inappropriate; that this corrupt relationship was between three individuals who were all acting on behalf of KWL; that there was no proper oversight of them by KWL or its Supervisory Board; and that UBS should not be held responsible for the fact that it had the misfortune to deal with criminals whose interest in personal financial gain and not anything said or done by UBS was at all times the driving force behind their actions. 
699.	I accept that there is something in this view of the matter, but I have found that in fact this “bigger picture” is not painted in quite such bright primary colours, or at any rate that the picture painted by UBS is not the whole canvas. Thus I do not accept that Dr Schirmer was actually aware of the impropriety of Mr Heininger’s relationship with Value Partners before September 2006 even if he ought to have investigated this relationship more closely before then; I have found that Value Partners was also the agent of UBS as well as of KWL, and that the bribe paid to Mr Heininger was paid within the scope of that agency relationship as well as being a breach of Value Partners’ duties owed to KWL; and that while the transaction was driven in part by the dishonest desire for personal gain of individuals who were for most purposes on the KWL side of the line, it was also driven by the corrupt relationship between Mr Bracy and Value Partners and the eagerness of UBS, including at the highest level, to conclude an unusual deal which despite its rejection by UBS’s own internal control function was just too profitable for UBS to turn away. 
700.	UBS cites the decision of the Court of Appeal in Hurstanger Ltd v Wilson [2007] EWCA Civ 299, [2007] 1 WLR 2351 in support of its submission that there is a discretion to refuse rescission when that remedy would be “unfair and disproportionate”. That was a case where a lender had disclosed that it might make some payment to the borrower’s agent, but did not disclose the amount of the payment or that it had in fact been paid. The Court of Appeal held that there was no informed consent to the payment by the borrower, who was entitled to equitable compensation from the lender in the amount of the payment, but not to rescind the loan and its related legal charge. 
701.	Assuming that there is such a discretion to refuse rescission, the facts of that case seem far removed from the present case. Here UBS is responsible in law for a substantial bribe paid by its agent to KWL’s managing director and it chose to deal with KWL through Value Partners knowing that Value Partners was failing in its duties as an agent owing fiduciary duties to KWL. Indeed the whole point of Mr Bracy’s arrangement with Value Partners was that the latter should abuse its position as a trusted adviser in order to deliver its clients to UBS. Rescission in such circumstances is not unfair or disproportionate in my view, despite the losses which UBS has suffered on its hedging contracts. A bank which enters into a corrupt arrangement with a financial intermediary who purports to be representing the other party to the transaction is not in a strong position to invoke general equitable principles as a matter of discretion and must take the consequences of its actions. To hold otherwise would be contrary to the approach of the Court of Appeal in The Ocean Frost (see the passage cited at [588] above). Far from giving effect to the “wider policy considerations” referred to by Lord Neuberger in the FHR European Ventures case which dictate a stringent approach by the court in cases of bribery (see [578] above), it would undermine them.
702.	The scope of the unclean hands principle was explained by Aikens LJ in Royal Bank of Scotland Plc v Highland Financial Partners LP [2013] EWCA Civ 328, [2013] 1 CLC 596, in a judgment with which Maurice Kay and Toulson LJJ agreed, at [158] and [159]:
“158. There is no dispute that there exists in English law a defence to a claim for equitable relief, such as an injunction, which is based on the concept encapsulated in the equitable maxim 'he who comes into equity must come with clean hands'. Mr Nicholls accepted that the doctrine applies to a claim for an anti-suit injunction where the claim is based on an allegation that the defendant has started proceedings in a foreign jurisdiction in breach of contract because the claimant and defendant had agreed to an exclusive jurisdiction clause in favour of the English courts. It is clear from the speech of Lord Bingham in Donohue v Armco Inc [2002] CLC 440 at [24] that this defence is distinct from that of there being 'strong reason’ not to grant an anti-suit injunction. 
159. It was common ground that the scope of the application of the 'unclean hands' doctrine is limited. To paraphrase the words of Lord Chief Baron Eyre in Dering v Earl of Winchelsea (1787) 1 Cox Eq Cas 318 at 319 the misconduct or impropriety of the claimant must have 'an immediate and necessary relation to the equity sued for'. That limitation has been expressed in different ways over the years in cases and textbooks. Recently in Fiona Trust & Holding Corp v Privalov [2008] EWHC 1748 (Comm) Andrew Smith J noted that there are some authorities in which the court regarded attempts to mislead it as presenting good grounds for refusing equitable relief, not only where the purpose is to create a false case but also where it is to bolster the truth with fabricated evidence. But the cases noted by him were ones where the misconduct was by way of deception in the course of the very litigation directed to securing the equitable relief. Spry: Principles of Equitable Remedies (8th edn, 2010) suggests that it must be shown that the claimant is seeking 'to derive advantage from his dishonest conduct in so direct a manner that it is considered to be unjust to grant him relief'. Ultimately in each case it is a matter of assessment by the judge, who has to examine all the relevant factors in the case before him to see if the misconduct of the claimant is sufficient to warrant a refusal of the relief sought.”
703.	It is apparent from this passage that it is not every impropriety by an applicant for equitable relief which comes within the scope of the doctrine, but only those which have “an immediate and necessary relation to the equity sued for”. That raises some questions as to the relationship between the “unclean hands” doctrine and any more general power to refuse rescission as being “unfair and disproportionate” as in Hurstanger Ltd v Wilson. If a case fails by a narrow margin to come within the scope of the “unclean hands” doctrine, is there nevertheless (and if so in what circumstances) a broader power to refuse rescission on the ground that it would be unfair? Such questions were not explored in argument and it is unnecessary on the facts of this case to attempt to resolve them.
704.	UBS puts its case on “unclean hands” in two overlapping ways, by reference to the principles stated by Aikens LJ. The first is that “the equity sued for" by KWL is rescission of the contract, when it was the corrupt relationship between its own managing director and Value Partners which led to these transactions being entered into. This is in essence a re-run of UBS’s “bigger picture” argument and I reject it for the same reasons. 
705.	The second is that UBS was a victim of Mr Heininger’s fraud by reason of the statements made by him on behalf of KWL at the 30 May 2006 due diligence meeting and in the Engagement Letter and Risk Disclosure Letter. Despite the old fashioned language (“an immediate and necessary relation to the equity sued for”), it is apparent that if an equitable remedy is to be refused on the grounds of “unclean hands”, there will need to be a close connection between the remedy sought and the misconduct in question. Hence the Spry formulation that the applicant for equitable relief must be seeking “to derive advantage from his dishonest conduct in so direct a manner that it is considered to be unjust to grant him relief”.
706.	In the present case I have found that the fraudulent statements made by Mr Heininger were not the cause of the losses suffered by UBS on its hedging contracts, but that those losses were caused by UBS’s own misconduct or the misconduct of those for whom it is responsible in law. Moreover the reason why the principal lie told by Mr Heininger, namely that KWL was entering into the transaction in good faith and in the ordinary course of business, was untrue was that he had been bribed by UBS’s own agent Value Partners with whom UBS in the person of Mr Bracy had entered into a corrupt arrangement, albeit that the intention to give and receive a bribe ante-dated the agency relationship. It seems to me in those circumstances that the requirements of the “unclean hands” doctrine are not satisfied and that, on the contrary, to allow UBS to enforce the transaction by denying KWL the right to rescind it would itself work an injustice. 
707.	I conclude, therefore, that KWL has validly rescinded the Balaba STCDO and that UBS’s claim to enforce it fails. 
708.	I consider the consequences of that rescission at [717] below. Before doing so, however, it is convenient to deal with KWL’s damages claims. 
KWL’s claim for damages or an indemnity
709.	Rescission of the Balaba STCDO, together with a working out of the consequences of that rescission, will be sufficient to dispose of the claim brought by UBS against KWL in these proceedings. However, the Balaba transaction was only the first part of the transaction as a whole. The parties had intended that all four single name bonds be restructured by UBS, and that this should happen in early June 2006, but UBS’s CRC and senior management were unwilling to sanction the remaining parts of the transaction unless UBS found one or more intermediary banks willing to act as the party taking the credit risk on KWL. As a result, the claims for payment under the remaining STCDOs are made against KWL by LBBW and Depfa.
710.	The existence of these arrangements means that the defects in the STCDO transactions set out above give rise to counterclaims by KWL against UBS, rather than defences, in relation to the LBBW and Depfa STCDOs. The underlying facts, however, are the same. Thus:
a.	KWL has been held liable to LBBW on the LBBW STCDO (subject to quantum which is to be decided) in the first instance proceedings before the Leipzig Regional Court. If that decision is upheld on appeal, it seems likely that KWL will be required to pay sums claimed by LBBW under the LBBW STCDO, despite the fact that KWL’s entry into the LBBW STCDO was affected by the bribe paid to Mr Heininger for which UBS is responsible in law and the conflict of interest of which UBS was aware. (The same point would have applied if KWL’s fraudulent misrepresentation defence had succeeded).
b.	Depfa claims in these proceedings sums said to be due from KWL under the Depfa Front Swaps. If that claim succeeds, KWL will be required to pay Depfa despite the fact that its entry into the Depfa STCDOs was equally affected by the bribe and conflict of interest. (Again, the same point would have applied if KWL’s fraudulent misrepresentation defence had succeeded).
711.	In those circumstances, KWL says that UBS is liable to it in respect of any sum that it is required to pay to LBBW or Depfa. It does so on the basis that KWL is entitled to damages for any loss suffered by it as a result of entering into transactions procured by the payment of the bribe or at a time when its agent was operating under a conflict of interest of which UBS knew or to which it turned a blind eye.
712.	I accept that KWL is entitled to recover such damages. So far as bribery is concerned, this gives rise to a claim for equitable damages assessed in the same way as for a case of fraud. As Robert Goff LJ put it in The Ocean Frost in the passage cited at [588] above:
“It is now established that the claim against the briber for damages, which appears in origin to have been a claim for equitable fraud, should be regarded as a claim in damages in tort: see the Mahesan case [1979] AC 374, 383, per Lord Diplock.”
713.	So far as conflict of interest is concerned, the same remedies applicable in a case of bribery apply equally to a case where a party is deprived of the disinterested advice of its agent by or to the knowledge of the other party. In Logicrose v Southend United F.C. [1988] 1 WLR 1256 at 1261 Millett J treated this at as equivalent to knowing assistance in a breach of trust:
“Parties to negotiations do not owe each other a duty to act reasonably, but only to act honestly. In the present context, the principal's right is a right to rescind for fraud, not negligence. There is in my judgment a close parallel with the cases on knowing assistance in a breach of trust. The same facts may give rise to different remedies, and as the present case demonstrates it will often be impossible to distinguish between the payment of a bribe or secret commission properly so-called and the diversion of the principal's money into the agent's pocket. There cannot in truth be any real difference between the secret payment to the agent of a sum additional to the purchase price and the payment to him of part of the purchase price of which his principal is unaware.”
714.	The only issue is whether the bribe and the conflict of interest continued to affect the LBBW and Depfa transactions. In my judgment it is clear that they did. Although Mr Bracy and indeed Value Partners played a less prominent role in the negotiation of the LBBW and Depfa STCDOs, they continued to play some part, while other members of the UBS deal team such as Mr Czekalowski and Mr Sanz-Paris were fully involved. In any event, these later contracts were, as between UBS and KWL, all part of what was seen as a single transaction, with UBS taking the lead in finding banks which were prepared to act as intermediaries, stepping into a structure which had already been established. As KWL submits, it would make no sense for KWL to have a remedy against UBS in relation to the Balaba STCDO but not in relation to the other STCDOs, when in substance all four STCDOs formed part of a single transaction and the bribery and conflict of interest which give rise to a remedy in the case of Balaba continued to operate in the case of the other STCDOs. 
715.	UBS has pleaded that KWL is time barred from raising by amendment a claim of dishonest assistance based upon UBS’s participation in the STCDO transactions in the knowledge that Value Partners had a conflict of interest. This plea was mentioned briefly in UBS’s written submissions but was not developed orally. I reject it. The arrangement between Mr Bracy and Value Partners to deliver clients to UBS did not come to light until after disclosure in the course of these proceedings. Indeed the full extent of that relationship as shown by the “letter for K” episode only emerged during the trial. The relevant limitation period is six years from the date when KWL discovered the fraud or could with reasonable diligence have discovered it (section 32 of the Limitation Act 1980). KWL had no basis to suspect UBS until 2010 at the earliest, and in reality even later.
716.	Accordingly KWL’s damages claims against UBS stand or fall with its defences set out above. If (as I have held) it is entitled to rescind the Balaba STCDO, then it is equally entitled to damages (or to an indemnity) from UBS in the event that it is required to pay LBBW and/or Depfa the amounts due under the LBBW or Depfa Front Swaps. 
Consequences of rescission of the Balaba STCDO
717.	In the event that the Balaba STCDO is found to have been validly rescinded, UBS claims restitution of the premium paid to KWL. The total premium paid by UBS was US $34.7 million and € 7.6 million.  These sums were paid as follows:  
a.	The premium for the Balaba STCDO was US $22.7 million (US $21.1 million was paid into the Wilmington Trust account once the US $1.6 million owed by KWL to UBS for the Balaba CDS was netted off).  
b.	The premium for the LBBW STCDO was €7.6 million (€6.4 million was paid by UBS into the Wilmington Account once the €1.2 million owed by KWL for the GECC CDS was netted off). 
c.	The premium for the Depfa leg was US $12 million; US $7 million was paid by UBS into the transaction structure as a trading reserve on KWL’s instructions, after US $5 million owed by KWL for the MBIA and Merrill Lynch CDSs were netted off.
718.	UBS claims also to recover the premium of £3.3 million paid to KWL in September 2008 on the unwinding of the Balaba CDS. 
719.	KWL accepts in principle that it must return these sums, but with certain exceptions. These are (i) the bribe paid to Mr Heininger, (ii) the sums siphoned off by Value Partners, (iii) sums paid or payable to KWL under the single name CDSs, and (iv) sums received by KWL which it used to purchase additional subordination in the STCDOs.
720.	The purpose of rescission or avoidance is to restore the parties, so far as possible, to the position in which they were before the contract in question was concluded. There may come a point at which such restitution in integrum is impossible, such that the remedy of rescission is no longer available, but the court has a degree of flexibility in order to ensure that practical justice is achieved: see the summary at Chitty on Contracts, (31st Edn, 2012), Volume 1, paras 6-120 and 6-121. Applying that principle, I approach this issue on the following basis. 
721.	First, the Balaba STCDO and the single name CDS constituted a single transaction, despite the fact that they were contained in two separate contractual documents. That was always the commercial reality. There was never any question of one being concluded without the other. Without the STCDO, KWL would have had no interest in entering into a CDS. Without the premium generated by the STCDO, it would probably not have had the readily available cash to pay the premium required for the CDS. Accordingly, any restitution in integrum which allowed KWL to retain benefits derived from the CDS would fail to give effect to the practical justice which the law requires. 
722.	Second, although the later parts were complicated by the intervention of LBBW and Depfa as intermediaries, as between UBS and KWL all four parts of this transaction were in reality a single transaction for the restructuring of the liabilities under KWL’s single name bonds. 
723.	Third, just as in the case of the Balaba transaction, it would be similarly unjust to allow KWL to benefit from other CDSs into which it entered. Those CDSs were concluded directly with UBS but represent in each case the other half of the STCDO transactions concluded with LBBW and Depfa. The effect of my decision on KWL’s damages/indemnity claims is effectively the same as if, from KWL’s point of view, those STCDOs had been rescinded, as KWL will be indemnified by UBS against any liability thereunder (although see further [791] and [799] below). It follows in my view that KWL cannot retain the benefit from the CDSs. One way to give effect to that view would be to say that KWL must give credit against any damages claim for sums due to it under the CDSs. However, it is preferable, in my judgment, to hold that one aspect of the practical justice which has to be achieved in rescinding the Balaba STCDO is that the various CDSs must also be unwound in order to put both UBS and KWL as nearly as possible into the position in which they would have been if these transactions had not been concluded. KWL cannot pick and choose which of the individual contracts it will leave in place.
724.	In this case there could be no doubt that if KWL had actually received the premium, upon avoiding the STCDO it would be bound to return it to UBS as an aspect of restitution in integrum. The question is whether the position is different in the case of each of the exceptions set out at [719] above for which KWL contends. I consider in turn in the light of the approach set out above whether it would be unjust to rescind the STCDO without requiring KWL to reimburse UBS for the premium in question.
The bribe paid to Mr Heininger
725.	The bribe paid to Mr Heininger (about US $3 million) was never in fact received by KWL. Although UBS was not aware of that bribe, I have held that UBS was responsible in law for its payment, and thus for the fact that KWL did not receive this money. Accordingly justice does not require that KWL restore this element of the premium to UBS. That would be a travesty.
The sums siphoned off by Value Partners
726.	As a matter of fact, the sums siphoned off by Value Partners were not in fact received by KWL either, but in my view they are in a materially different position from the bribe paid to Mr Heininger. While the effect of the arrangement between Mr Bracy and Value Partners was to constitute Value Partners as UBS’s agent for the purpose of delivering KWL to UBS as a contractual counterparty so that payment of the bribe was within the scope of that agency, it could not be and was not suggested that Value Partners was acting as UBS’s agent in siphoning off the greater part of the premium. On the contrary, that was done in its capacity as KWL’s agent pursuant to a letter signed by both of KWL’s two managing directors (see [391] above). So far as UBS is concerned, therefore, this part of the premium was paid in accordance with KWL’s instructions. The fact that KWL’s own agent then misappropriated it is a matter for which KWL is responsible. There is no good reason why this part of the premium should not be repaid to UBS.
Sums paid or payable to KWL under the single name CDSs 
727.	The Balaba CDS was unwound by agreement in September 2008 on payment of a premium of £3.3 million by UBS to reflect the fact that KWL was “in the money” on this contract. Once it is concluded that the STCDO and the CDS comprised a single transaction, I see no reason why this payment should not be returned. If KWL were to keep it, it would be better off than if the transaction had not been concluded in the first place.
728.	So far as the remaining CDSs are concerned, UBS’s claim for return of premium on the STCDOs is (or at any rate should be) confined to the net STCDO premium after deduction of the CDS premia, which therefore need not be considered further. In addition, however, KWL claims US $66,916,676 from UBS, being the sum due to it on the Early Termination of the GECC, MBIA and Merrill Lynch single-name CDSs which were “in the money” for KWL. UBS acknowledges this as a credit to which KWL is entitled by way of set off against its claim to recover under the Balaba STCDO, but that set off only exists on the basis that, contrary to what I have held, the Balaba STCDO is enforceable against KWL. KWL contends that it is not only entitled to rescind the Balaba STCDO and to be indemnified by UBS for any liability which it may have under the LBBW and Depfa Front Swaps, but also to recover the (almost) US $67 million due to it on Early Termination of these three CDSs. This would be a fairy tale ending for KWL to this otherwise rather sad story. It would mean that this transaction, in which KWL was defrauded by its own crooked managing director and corrupt agent, and which was disastrously affected by the worst financial crisis in living memory, had turned out to be massively profitable for it after all.
729.	That result would not accord with practical justice or with the approach to rescission set out above. KWL cannot rescind the Balaba STCDO and recover the sum due on the CDSs.
Sums received by KWL and used to purchase additional subordination 
730.	Some part of the premium actually received by KWL was used to purchase additional subordination for the STCDOs in the course of their management by UBS GAM -- in other words, to provide additional protection against losses by raising the attachment point at which defaults would impact KWL’s tranche. This is expenditure which would not have been necessary or even possible if the STCDOs in question had not been concluded. To require KWL to return the premium to UBS without making an exception for sums expended in this way would leave KWL worse off than if the STCDOs had not been concluded. 
Conclusion
731.	UBS’s claims for (a) return of the net premium paid to KWL in the sum of US $28.1 million and €6.4 million and (b) £3.3 million paid to unwind the Balaba CDS succeed, less the total of (i) the amount of the bribe paid to Mr Heininger and (ii) sums received by KWL and used to purchase additional subordination. KWL’s claim for payment of the Early Termination amount on the GECC, MBIA and Merrill Lynch single-name CDSs is dismissed.
RESCISSION OF THE DEPFA BACK SWAPS
732.	I deal next with the Depfa Back Swaps and in particular with Depfa’s claim to have rescinded those STCDOs by letter dated 16 June 2014 on the ground of misrepresentation by UBS. This plea was introduced by an amendment during the trial, following the evidence of Mr Bracy and in particular the emergence of what I have called the “letter for K” episode (which Depfa characterises as the “October cover-up”). This revealed that, certainly as of October 2006 and therefore before the intermediation transaction was even presented to Depfa, Mr Bracy knew that Messrs Senf and Blatz were dishonest. A similar but more wide ranging amendment was also made by LBBW, although by October 2006 the LBBW transaction had already been concluded. It is therefore convenient to consider first the position of Depfa. 
The representations relied upon
733.	The representations on which Depfa relies are as follows:
a.	that the opportunity being presented to Depfa was a proper and viable one;
b.	that UBS did not have any significant concerns as to the validity and enforceability of the Front Swaps; 
c.	that UBS was not aware that the managing directors of KWL were acting in abuse of their power of representation in entering into the Front Swaps; and
d.	that UBS believed Value Partners and Mr Heininger to be honest, and did not have any significant doubts as to their honesty.
734.	As I understand Depfa’s case, the first three of these representations are contingent, in that its case as to the falsity of the representations alleged to have been made by UBS depends on KWL establishing the various defences which it puts forward in response to UBS’s claim with which I have already dealt, as to which Depfa is neutral. The fourth representation, however, is independent of those issues.
735.	Depfa’s case is that for the purpose of these representations, the knowledge of Mr Bracy is to be regarded as the knowledge of UBS and, on that basis, the representations were made fraudulently. Alternatively it says that UBS has failed to disprove negligence as required by section 2(1) of the Misrepresentation Act 1967 and, in any event, that even if misrepresentations were made innocently, that is sufficient to entitle Depfa to rescind the Back Swap.
736.	UBS denies that any such representations were made and says that, even if they were, they were either true or represented the true opinion of the persons making them as nobody within UBS apart from Mr Bracy and Mr Maron had any knowledge of the "letter for K" episode. It says further that Depfa did not rely on any such representations because it must have known of the allegations against Mr Heininger which received widespread publicity in the Leipzig press, but nevertheless decided to go ahead with the transaction. To the extent that the representations were made negligently or innocently, UBS relies also on an entire agreement clause in the ISDA Master Agreement between UBS and Depfa and on a non-reliance clause in the Depfa Back Swaps.
737.	The questions which arise are therefore as follows: (a) were any of these representations made by UBS? (b) were they false? (c) were they made fraudulently? (d) is Depfa’s reliance on a negligent or innocent misrepresentation ruled out by the clauses on which UBS relies? and (e) did Depfa rely on the representations?
Were the representations made?
738.	It is common ground between UBS and Depfa that when the transaction was first presented to Depfa, UBS informed it that the reason why an intermediary was required was because UBS’s internal credit lines were full, and that it was therefore unable to conclude the transaction directly with KWL itself. It follows, as is also common ground, that UBS impliedly represented that if it had had sufficient credit lines, it would have contracted with KWL directly. This was true. The need for intermediary banks arose from CRC’s unwillingness to accept full credit exposure to KWL on all four STCDOs and was the solution devised by UBS’s senior management to resolve that problem. Depfa contends, however, that it was implicit in what it was told about this by UBS, in the fact that UBS told Depfa that it had done due diligence on KWL, and in the fact that the transaction was presented to Depfa at all, that UBS was also impliedly making the further representations set out at [733] above. In essence, it says that if those matters had not represented UBS’s state of mind, it could not as a reputable bank have presented this transaction to Depfa, and that Depfa was therefore entitled to understand that these representations were being made to it.
739.	It is not in dispute that the relevant legal principles for determining whether an implied representation is made were as summarised by Christopher Clarke J in Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc [2010] EWHC 1392 (Comm), [2011] 1  Lloyd’s Rep 123 at [82] to [87]:
“82. In the case of an express statement, ‘the court has to consider what a reasonable person would have understood from the words used in the context in which they were used’: IFE Fund SA v Goldman Sachs International [2007] 1 Lloyd's Rep 264, per Toulson J at [50] (upheld by the Court of Appeal at [2007] 2 Lloyd's Rep 449). The answer to that question may depend on the nature and content of the statement, the context in which it was made, the characteristics of the maker and of the person to whom it was made, and the relationship between them. 
83. … In the case of an implied statement, ‘the court has to perform a similar task, except that it has to consider what a reasonable person would have inferred was being implicitly represented by the representor's words and conduct in their context’: ibid. ... 
85. The essential question is whether in all the circumstances it has been impliedly represented by the defendant that there exists some state of facts different from the truth. In evaluating the effect of what was said a helpful test is whether a reasonable representee would naturally assume that the true state of facts did not exist and that, had it existed, he would in all the circumstances necessarily have been informed of it: Geest plc v. Fyffes Plc [1999] 1 All ER (Comm) 672, at 683 (per Colman J). …
86. It is also necessary for the statement relied on to have the character of a statement upon which the representee was intended, and was entitled, to rely. In some cases the statement in question may have been accompanied by other statements by way of qualification or explanation which would indicate to a reasonable person that the putative representor was not assuming a responsibility for the accuracy or completeness of the statement or was saying that no reliance can be placed upon it. Thus the representor may qualify what might otherwise have been an outright statement of fact by saying that it is only a statement of belief, that it may not be accurate, that he has not verified its accuracy or completeness, or that it is not to be relied on. 
87. Lastly the claimant must show that he in fact understood the statement in the sense (so far as material) which the court ascribes to it: Arkwright v Newbold (1881) 17 Ch D 301; Smith v Chadwick (1884) 9 App Cas 187; and that, having that understanding, he relied on it. This may be of particular significance in the case of implied statements.”
No knowledge of dishonesty
740.	Applying these principles, I have no doubt that UBS did impliedly represent that it believed Value Partners and Mr Heininger to be honest, and did not have any significant doubts as to their honesty. I shall refer to this as the "no knowledge of dishonesty" representation. No reputable or honest banker would have proposed such a transaction to another bank in which it knew or believed the counterparty or its agent to be dishonest or in circumstances where it had significant doubts about this. 
741.	This was acknowledged by Mr Sanz-Paris in his evidence. He was first asked by Mr Lord on behalf of KWL about some “general banking principles”:
“MR LORD: Mr Sanz-Paris, I'm going to ask you first, if I may, about some general banking principles. I wonder if you would agree that one of the fundamental principles of banking is one of integrity, most importantly honest dealing?
A. Yes.
Q. And that principle will be particularly important, wouldn't it, in a banking context, because there would be a risk, wouldn't there, that otherwise dishonest transactions and actions may take place?
A. Yes.
Q. And there might be a risk, mightn't there, that people would be tempted to do dishonest things in and about the money involved?
A. Yes.
Q. And that importance of honesty would apply, wouldn't it, to any counterparty of a bank?
A. Yes.
Q. And it would apply, wouldn't it, to any intermediary that the bank dealt with or through?
A. Yes.
Q. And it would also apply, wouldn't it, to the actions of the bank as well?
A. Yes.
Q. Can I just pose for you a number of hypothetical situations and to get your answer for his Lordship as to what you would do in the circumstances I'm going to posit. Could I start, please, Mr Sanz-Paris, by positing this: that a banker receives a corrupt proposal by an intermediary to fabricate documents to support a managing director of a counterparty of the bank. Can you just assume that for one minute. Do you understand the premise? Do you understand what I'm asking you to assume?
A. Yes.
Q. That proposal by the intermediary would be a seriously dishonest one, wouldn't it?
A. Yes.
Q. And if a banker got notice of that seriously dishonest proposal, it would amount to a red flag to any honest banker, wouldn't it? 
A. Not a red flag. If the banker knew it was a dishonest and corrupt proposal, it's not a red flag, it's a no.
Q. So it's a no. So if the banker knows that it's a dishonest and corrupt proposal, and you say ‘it's a no’, can his Lordship take from that that the bank should have nothing more to do with that corrupt intermediary?
A. If the banker knew to be corrupt, yes.
Q. If the bank was on notice of a dishonest proposal by an intermediary, that would be a no in the sense that the bank should immediately cease to deal with that intermediary, shouldn't it?
A. One assumption is the banker understood and knew that proposal to be dishonest.
Q. Yes.
A. Yes.
Q. But if you assume the banker knows it to be a dishonest proposal, the bank should immediately cease to deal with that intermediary, shouldn't it?
A. Yes.”
742.	Of course, Mr Lord’s “hypothetical situation” was no such thing. It was, as Mr Sanz-Paris understood, a summary of the facts of the "letter for K" episode. Mr David Railton QC on behalf of Depfa returned to the same theme with Mr Sanz-Paris, formulating his questions by reference to the understanding of a reasonable banker to whom the deal was presented:
“Q (by Mr Railton). And it's particularly bad, isn't it, because it's not just brazen dishonesty by Value Partners and Mr Heininger, but they are actually teaming up to try to deceive KWL who they are meant to be working for.
A. Yes.
Q. It's simply outrageous, isn't it, Mr Sanz-Paris?
A. Yes.
…
Q. And it's quite obvious, isn't it, that if Mr Bracy had reported this up the chain within UBS, either to Mr Czekalowski, CRC, Compliance, or whoever the right people were to report it to, UBS would have had nothing more to do with Value Partners or Mr Heininger, would they?
A. I think that is correct.
Q. It simply wouldn't deal, would it, with people who behave dishonestly in that way?
A. Yes.
Q. And if that had happened, of course the intermediation exercise that we were talking about yesterday would be dead before Depfa was even approached?
A. Yes.
Q. And you would certainly never have written to Depfa in the terms you did, which we were looking at yesterday. Perhaps I can just show you again.  [Reference was made to an email in which Mr Sanz-Paris confirmed that UBS had done its own due diligence on KWL and said that Depfa must do the same]. You remember that email? In the middle of the page, you talk about the due diligence that you've done on KWL, the deal, to which Mr Selim adds at the top of the page saying that you've also done due diligence on Value Partners. You never would have written in those terms to Depfa.
A. That is correct. 
Q. And you wouldn't have done so, because if UBS had known about Value Partners and Mr Heininger's dishonesty, it would be fundamentally misleading to present this deal to Depfa without telling them about it?
A. That is correct.
Q. And I think you would agree that honesty and integrity is a fundamental in the banking world?
A. In all walks of life, but in banking especially, yes.
Q. And anyone to whom the deal is presented could take it as read that UBS don't know Value Partners and Mr Heininger to be dishonest?
A. Could you repeat the question, please?
Q. Yes.  Anyone to whom this deal was presented could just take it as read, the fact -- could assume from the fact -- sorry about the use of the language – but anyone to whom the deal is presented could assume from the fact that it has been presented by UBS, that UBS don't know Value Partners and Mr Heininger to be dishonest?
A. That is correct, yes.
Q. It's obvious, isn't it?  In a sense I'm sorry to ask you this question because it is so obvious.
A. Okay.
Q. But it's obvious, isn't it, that no reputable bank who knew of Value Partners' and Mr Heininger's dishonesty would proceed with this transaction?
A. That is correct.
Q. I think, as you put it eloquently last Friday in answer to some questions from Mr Lord, you said: it's not just a red flag, it's a no, isn't it?
A. That is correct, yes.”
743.	The answers which Mr Sanz-Paris gave in these passages were inevitable. I accept them as evidence of what a reasonable and honest banker ought to do and what a bank in the position of Depfa could reasonably understand, despite the fact that at least some aspects of Mr Sanz-Paris’s own conduct in this regard were highly questionable (see [82] above).
No knowledge of taint
744.	The first two representations on which Depfa relies are more problematic. A representation that an opportunity or a proposed transaction presented to a bank is “proper and viable” is rather vague, while a representation that a bank "did not have any significant concerns as to the validity and enforceability” of a transaction begs the question of what is meant by a "significant concern". (In view of my conclusion that there was no evident abuse of the KWL managing directors’ power of representation in entering into the Balaba STCDO, Depfa’s third proposed representation need not be further considered). Recognising this, in closing Depfa reformulated its "proper and viable" representation by reference to the particular facts of this case so that the representation relied on was that the intermediation opportunity was "proper and viable in that there was no bribe, fraudulent misrepresentation or conflict of interest". However, to regard UBS as making a representation in these very specific terms seems rather unrealistic. (As I have found that there was no fraudulent misrepresentation by UBS, what matters here is the absence of a bribe or conflict of interest).
745.	Depfa relies on evidence given by Mr Czekalowski, Mr Lancaster (both of whom gave evidence before Mr Bracy) and Mr Sanz-Paris as to what a reasonable banker would have understood from the way in which the transaction was presented. The evidence of all three was to the same effect. It is sufficient to refer to the evidence of Mr Sanz-Paris. He was first reminded of the matters relied on by KWL and agreed that UBS would not have proceeded with the transaction itself if it had received any hint that Mr Heininger had been bribed or if it believed that Value Partners was in an inappropriate and undisclosed conflict of interest. The cross examination continued:
“Q (by Mr Railton). You recall I've just been through four instances that are relied on in some respects by KWL: bribe; conflict of interest; misrepresentation; lack of authority?
A. Yes.
Q. And the reason why you wouldn't proceed in those circumstances, I would suggest, is that UBS would not want to do business which had such problems buried within it.
A. I think that's the right assumption, yes.
Q.  And you certainly wouldn't present it as a business opportunity to Depfa if you had those problems in the transaction?
A. I agree.  I mean, UBS would not do a transaction, I would not present a transaction I was not comfortable with, yes.
Q. And if you did present it to Depfa, you would make sure that you would tell them what the problems were?
A. Well, if there were problems, I don't think we would present it altogether.
Q. No, I understand. And of course, from Depfa's point of view, they could rightly assume, couldn't they, that when UBS invites them in to intermediate, that you don't know that there are problems of that nature that we have been through with the transaction?
A. That is correct.
Q. And indeed, they could rightly assume, couldn't they, that it's a genuine and proper business opportunity that you're inviting them to participate in?
A. Yes.
Q. And that's simply because no reputable bank would try to sign up a third party to a transaction that it knew was flawed in that sort of way?
A. Yes.”
746.	Thus the representation actually put to Mr Sanz-Paris was that UBS did not know of the problems or flaws in question. What was ultimately put to and agreed by Mr Czekalowski (“from Depfa's point of view, they could rightly assume, couldn't they, that when you invite them to intermediate, you don't know that there are problems of the nature we've just discussed with the transaction”) and Mr Lancaster (“your prospective counterparty, Depfa, would be fully entitled to assume, wouldn't it, from the fact you were presenting the intermediation opportunity to it, that you weren't aware of any such problems”) was to the same effect.
747.	In the light of this evidence I would not accept that the first and second representations relied on by Depfa were made in the terms set out at [733] above, but I do accept that an implied representation was made to the effect that UBS did not know that the transaction opportunity which it was presenting was tainted as a result of the bribery of Mr Heininger or the conflict of interest to which Value Partners was subject. I shall refer to this as the "no knowledge of taint" representation. Although these are not the precise terms in which Depfa pleaded its case, they reflect the case put to the UBS witnesses and agreed by them, so there is no injustice to UBS in allowing the case to be put in this way.
748.	One point should be clarified. The representation which I consider to have been made was that the transaction was not known to be tainted. This is the case which was put to the UBS witnesses. However, it was not a representation about UBS's knowledge of the precise legal consequences of such a taint. It would be sufficient that the transaction was known to be tainted or affected by bribery or a conflict of interest. 
749.	UBS denies that either of the representations which I have found to be implicit in UBS's presentation of the intermediation opportunity to Depfa was made. It does so on the ground that it was made clear to Depfa, as I accept that it was, that it must carry out its own due diligence on KWL and Value Partners and could not rely on the due diligence carried out by UBS. It relies in particular on evidence given by Mr Gidoomal of Depfa:
“Q (by Lord Falconer). Thirdly, they had told you that they had done due diligence on KWL?
A. Right, yes.
Q. But that you, Depfa, had to do your own due diligence on KWL?
A. Yes.
Q. That you couldn't, therefore, rely on the due diligence done by UBS on KWL?
A. Yes.
Q. And it would be up to you as to what you did in relation to Value Partners, but again you couldn't rely on any due diligence done by UBS on them?
A. Yes, and my understanding here was that UBS did not want to us to be making decisions based on work that they had done and then going back to them at a later stage saying we relied on your internal credit work or due diligence work, so now it is your fault. So they were -- yes, they didn't want us to have that risk.”
750.	However, it is one thing to say that Depfa had to do its own due diligence. It is quite another thing to say that UBS would conceal from Depfa its own actual knowledge of Value Partners' or Mr Heininger’s dishonesty or of ways in which the transaction it was presenting were tainted. The evidence of Mr Sanz-Paris quoted above illustrates the difference. His evidence was clear that Depfa was entitled to assume that UBS did not have such knowledge, despite the fact that it also explained that Depfa should undertake its own due diligence.
Were the representations false?
751.	Whether the "no knowledge of dishonesty" representation was false depends in part on the issue considered below whether the knowledge of Mr Bracy is to be regarded as the knowledge of UBS. Depfa does not suggest that anybody in UBS apart from Mr Bracy and Mr Maron was aware of the "letter for K" episode which (in Depfa’s case) gives rise to this misrepresentation case. I have accepted that Mr Bracy did not tell others about this. However, Depfa indicated that although it made no positive case itself, it would rely on any findings which I might make as between UBS and KWL as to the knowledge of others within UBS. In this regard I have found that even though Mr Sanz-Paris did not know about the “letter for K” episode, he knew enough to realise that there was something seriously wrong about Messrs Senf and Blatz (see [470] above). I conclude, therefore, that the "no knowledge of dishonesty" representation was false because UBS knew of the dishonesty of Value Partners, regardless of the issue concerning the attribution to UBS of Mr Bracy's knowledge about the “letter for K”.
752.	As for the “no knowledge of taint" representation, Depfa does not suggest that anybody at UBS was aware of the bribe paid to Mr Heininger or that the knowledge of Value Partners is to be attributed to UBS for this purpose. However, the position regarding conflict of interest is more complex. Mr Bracy at least was aware of the facts giving rise to the conflict of interest on the part of Value Partners and on this point UBS accepts that his knowledge counts as UBS’s knowledge (see [80] above). I find that Mr Bracy was a sufficiently experienced banker to appreciate that his arrangement with Value Partners was inappropriate and did involve such a conflict. On occasions, for example, he recognised expressly the need to avoid the appearance of a conflict of interest when he was in fact actively creating one. 
753.	Whether Mr Bracy or others actually understood that the consequence in law of such a conflict would be that any transaction entered into through Value Partners would be vulnerable to rescission, as distinct from the risk of (for example) regulatory intervention, seems more doubtful. For the most part Mr Bracy did not attempt to keep his close relationship with Value Partners a secret from others within UBS. On the contrary he boasted about it to his bosses, did everything he could to play up Value Partners’ role (even referring to “an extension of our staff”: see [200] above) and apparently without shame sent his friend Mr Maron’s list of clients for Value Partners to approach to Mr Sanz-Paris, as well as envisaging that the use to which this list would be put would impress his boss in the United States sufficiently to give Mr Maron a job ([198] above). All this suggests a collective blindness within some parts of UBS to obvious considerations of business propriety, but it is hard to think that UBS would so actively have pursued transactions which it knew were liable to be set aside. However, as the "no knowledge of taint" representation was a representation that UBS did not know the transaction to be tainted by a conflict of interest, and not a representation that UBS did not know that the transaction was liable to be set aside, I find that the representation was false. Mr Bracy at least had that knowledge and in my judgment so did Mr Sanz-Paris.
Were the representations fraudulent?
754.	For the purpose of a claim in fraud, Depfa must show that the representation in question was made dishonestly, with the intention that Depfa should rely upon it. I consider first the "no knowledge of dishonesty" representation. Here Depfa relies primarily on the knowledge and intention of Mr Bracy, although in view of what I have concluded regarding Mr Sanz-Paris, his knowledge and intention will also need to be considered.
755.	So far as Mr Bracy is concerned, a question arises whether his knowledge and intention are for this purpose to be attributed to UBS. UBS submits that (as I have accepted) nobody in UBS apart from Mr Bracy and Mr Maron knew about the "letter for K" episode; that their knowledge is not to be regarded as the knowledge of UBS; that by the time of the Depfa transaction, Mr Bracy was effectively no longer involved, and played no part in the decision to approach Depfa, in any provision of information to Depfa, or in any discussion or negotiation with Depfa; and that he was therefore not responsible for the making of any representation to Depfa. It is simply a case, according to UBS, of one agent or representative of UBS making a statement believing it to be true, even though another agent or representative not responsible for the representation and not being aware of its being made knows facts making it untrue.
756.	I accept that if this were such a case, there would be no fraudulent state of mind on the part of UBS. As explained in Clerk & Lindsell (20th Edn, 2010) at para 18-28:
“However, to render the principal liable in an action of deceit in such a case, it must it seems be proved that there was a fraudulent state of mind on his part: that is, that he intended the claimant to be misled or at the very least was indifferent as to whether he might be. Where a false representation has been made innocently by an agent acting within his authority, the mere fact that the principal knows the facts which render the representation false will not make the latter liable if he has not expressly authorised the representation or deliberately concealed facts from the agent with a view to the claimant being misled. So in Armstrong v Strain [1952] 1 KB 232 estate agents with general authority to make representations about a house on their books innocently told a purchaser that it was sound when, as the owner knew, it was not. The Court of Appeal upheld a finding that the owner was not liable to the purchaser in deceit.”
757.	The position is different, however, if the relevant knowledge and intention rest with the same individual within the organisation making the representation. The knowledge and intention need not be with the particular individual who makes the representation. As stated in Bowstead & Reynolds on Agency (20th Edn, 2014) at para 8-185: 
“(a) The principal is liable if he authorised the agent to make the false representation which he (the principal) knew to be untrue (or did not believe to be true), whether or not the agent knew the truth. 
(b) The principal is liable if, while not expressly authorising the agent to make the false representation, he knew it to be untrue and was guilty of some positive wrongful conduct, as by consciously permitting the agent to remain ignorant of the true facts, so as to prevent the disclosure of the truth to the third party, if the third party should ask the agent for information, or in the hope that the agent would make some false representation. The agent's representation when made would of course require to be within the scope of his actual or apparent authority.”
758.	A footnote explains that the position is the same if the wrongful conduct was that of another agent of the principal acting in the course of his employment, the principal being innocent.
759.	Chitty on Contracts (31st Edn, 2012) at para 6-052 is to the same effect, citing among other cases The Siboen and The Sibotre [1976] 1 Lloyd’s Rep 293 at 320-321: 
“if one agent makes a statement honestly believing it to be true, but another agent or the principal himself knows that it is not true, knows that the statement will be or has been made, and deliberately abstains from intervening, the principal will be liable. In these circumstances the party with the guilty knowledge can himself be treated as being guilty of fraud.”
760.	Accordingly there are four matters to be considered. The first is whether Mr Bracy’s knowledge of the dishonesty of Value Partners and Mr Heininger is to be regarded as the knowledge of UBS. The second, on the hypothesis that only Mr Bracy had the relevant knowledge, is whether Mr Bracy intended that the representation should be made to Depfa (or a bank in the position of Depfa). The third, on the same hypothesis, is whether his intention is likewise to be regarded as the intention of UBS. The fourth is whether the hypothesis that only Mr Bracy had the relevant knowledge is correct.
761.	I accept Depfa’s submission that in accordance with the ordinary rules of attribution, Mr Bracy’s knowledge of the “letter for K” episode is to be attributed to UBS. Those rules were explained by Lord Hoffmann in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, at 506-507: 
“A company exists because there is a rule (usually in a statute) which says that a persona ficta shall be deemed to exist and to have certain of the powers, rights and duties of a natural person. But there would be little sense in deeming such a persona ficta to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called 'the rules of attribution.' 
The company's primary rules of attribution will generally be found in its constitution, typically the articles of association, and will say things such as …'the decisions of the board in managing the company's business shall be the decisions of the company.' 
These primary rules of attribution are obviously not enough to enable a company to go out into the world and do business. Not every act on behalf of the company could be expected to be the subject of a resolution of the board or a unanimous decision of the shareholders. The company therefore builds upon the primary rules of attribution by using general rules of attribution which are equally available to natural persons, namely, the principles of agency. It will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company, and having done so, it will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort. 
The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations.”
762.	In this case the ordinary principles of agency are sufficient to determine whether Mr Bracy’s knowledge of the “letter for K” episode is to be attributed to UBS. As stated in Bowstead and Reynolds on Agency (20th Edn, 2014) at para 8-207):
“The law may impute to a principal knowledge relating to the subject matter of the agency which the agent acquires while acting within the scope of his authority.”
763.	Thus where an agent has authority to receive communications on behalf of a principal, communication to the agent is communication to the principal: El Ajou v Dollar Land Holdings Plc [1994] 2 All ER 685, per Hoffmann LJ. As Arden LJ explained in Real Estate Opportunities Limited v Aberdeen Asset Managers [2007] EWCA Civ 197 at [49]: 
“The ordinary rules of attribution are well-known. In general, an employer is deemed to have notice of anything of which any of his employees obtains knowledge in the course of his employment. Likewise a company is in general deemed to have notice of anything of which any of its directors obtains knowledge in the course of his duties.”
764.	Applying these principles in the present case, Mr Bracy was the person within UBS responsible for managing the bank’s relationship with Value Partners and liaising with it. He was entrusted with responsibility for the fostering and further development of this relationship by the senior management of UBS following the closure of the Balaba transaction, with little or no supervision, and was encouraged in this connection to “continue to push intra-divisional opportunities”, to “stay connected to Value Partners and involved with future transactions”, to explore ways in which UBS could “create value” for Value Partners and to exercise his entrepreneurial skills (see [371] to [390] above). It is obvious in those circumstances that, as Value Partners’ point of contact within UBS, he was authorised to receive information from and communicate with Value Partners. He was asked to provide the “letter for K” in that capacity. However, as I have found, while this episode demonstrated the dishonesty of Value Partners, it was not the original source of Mr Bracy's knowledge of that dishonesty, but merely a further confirmation of what was by then already apparent to him (see [465] above). As Mr Nicholas Peacock QC for LBBW put it, vividly but also accurately, “Mr Bracy did not know of the true depth of Value Partners’ corruption (nor of Mr Heininger’s participation in that corruption) but he did know, to put it bluntly, that Value Partners was willing to sell its clients’ interests (including the interests of KWL) down the river if there was money to be made”. That was so well before the request for a “letter for K”. 
765.	Moreover, to the extent that Depfa relies on the "letter for K" episode, this was closely linked with the further STCDO business Mr Bracy was seeking to procure for UBS with Value Partners, including the remaining STCDOs with KWL which in the event were concluded through Depfa. The reason for the approach to Mr Bracy was (among other things, but largely) to help Mr Heininger keep his job as a managing director of KWL which was critical to any further transactions with KWL. Mr Bracy’s willingness to assist Value Partners and Mr Heininger was to protect the prospect of further business with clients of Value Partners, not only in general but specifically with KWL.
766.	I conclude, therefore, that Mr Bracy’s knowledge of the dishonesty of Value Partners and Mr Heininger is to be regarded as the knowledge of UBS. 
767.	The next question is whether Mr Bracy intended that the "no knowledge of dishonesty" representation should be made to Depfa (or a bank in the position of Depfa). Contrary to UBS’s submission that he had little or no involvement in the Depfa transaction, he was well aware that the intermediation opportunity was being presented to Depfa and was kept informed of the progress of the negotiations, as well as being credited with marketing of the transaction in UBS’s TRPA document for the Depfa transaction. Indeed in an internal e-mail dated 14 December 2006 Mr Bracy summarised his successful role in originating and bringing to UBS the first two parts of the KWL transaction, with a third part to be done in 2007:
“Terry, the firm successfully closed a two part transaction for KWL, a German utility in 2006. The total revenue generated by the firm is as follows. Approximately $26 million was booked by the Fixed Income Structured and Exotic trading desk. In addition, UBS Asset Management was appointed as the asset manager to KWL. Their approximate revenue realization was $6 million. As you know, this transaction was originated by and brought into the firm by me utilizing as advisors Value Partners who were former colleagues of mine at CSFB. We collectively worked on the original transaction for KWL. 
FYI-for 2007 we are mandated for the City of Zurich to do a lease restructuring that should close in the first quarter. The revenue expectation for the firm is approximately $35 million which would be booked by the Fixed Income Structured and Exotic trading desk. We also are very far along with other opportunities that we expect will close in 2007 in the United States and Europe as well. We have another piece of KWL to do in 2007 and several strong restructuring candidates in the US.”
768.	He was also anxious to ensure that the Municipal Securities Group was credited with its share of the profits to reflect his contribution to the Depfa transaction.
769.	At all times Mr Bracy knew that if he had reported the “letter for K” episode as he ought to have done, that would have been the end of any further business. It was for precisely this reason that he did not report it. As an experienced banker he cannot have failed to appreciate, as other UBS witnesses did, that any bank to which the intermediation opportunity was presented would assume that UBS was not aware of any dishonesty on the part of Value Partners or Mr Heininger and that any bank which knew the true position would have nothing to do with this deal. It follows that he intended Depfa to be deceived.
770.	Just as Mr Bracy’s knowledge of Value Partners' dishonesty is to be attributed to UBS, so too in my judgment is his intention to mislead Depfa. This is a further and straightforward application of the principle already considered above that the conclusion by illegitimate means of a transaction which an agent is authorised to conclude by legitimate means falls within the scope of an agent's authority (see The Ocean Frost and Petrotrade Inc v Smith cited at [588] and [610] above). Mr Bracy was authorised to procure the conclusion of other transactions through Value Partners, including specifically with KWL. Having given him this authority, while providing little or no oversight of his activities, UBS cannot disown the statements which he made or caused to be made in order to do so.
771.	I have dealt with the knowledge and intention of Mr Bracy at some length because this is the primary way in which Depfa puts its case, and it was Mr Bracy’s evidence which led to Depfa’s rescission of the Depfa Back Swaps. If necessary, however, I would have held that Mr Sanz-Paris’s knowledge and intention were sufficient for Depfa’s purpose. He knew that there was something seriously wrong about Value Partners. He knew about the press allegations concerning inappropriate gifts to Mr Heininger but (at best) deliberately refrained from asking about this while enjoying Value Partners' hospitality. He knew that Mr Blatz had asked him (and he had agreed) to produce a misleading document, the "transaction overview". He was fully involved, more visibly than Mr Bracy so far as Depfa was concerned, in the presentation of the intermediation opportunity to Depfa and the subsequent negotiations. His evidence set out at [741] above shows that he would have understood the "no knowledge of dishonesty" representation to have been made to Depfa or any other potential intermediary. I did not understand UBS to dispute that if Mr Sanz-Paris had the relevant knowledge of Value Partners’ dishonesty, UBS could be taken to have the necessary knowledge and intention for a case in fraud.
772.	I have so far been dealing with the question whether the "no knowledge of dishonesty" representation was made dishonestly, but essentially the same analysis applies to the "no knowledge of taint" representation. Mr Bracy and for that matter Mr Sanz-Paris were aware of the existence of such a conflict and must have known and intended that any intermediary bank in the position of Depfa would understand that in presenting the intermediation opportunity UBS had no knowledge of such a taint. For the same reasons as given above, their knowledge and intention is to be attributed to UBS.
Contractual estoppel
773.	The conclusions reached so far mean that, subject to the issue of reliance, Depfa’s misrepresentation case succeeds in fraud. UBS accepts that the entire agreement and non-reliance clauses on which it relies cannot assist it to defeat a claim in fraud, and would only be relevant if any misrepresentation was negligent or innocent. In that event the clauses on which UBS relies are, first, the entire agreement clause in the ISDA Master Agreement between UBS and Depfa and, second, the non-reliance clause in the Depfa Back Swap.
774.	The ISDA Master Agreement provided, at clause 9(a), that: 
“This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communication and prior writings with respect thereto.”
“Agreement” here is a reference to the Master Agreement and to all confirmations thereunder.
775.	The Depfa Back Swap confirmations each provided that: 
“Non-Reliance. Each party is acting for its own account, and has made its own independent decisions to enter into this Transaction and that the Transaction is appropriate or proper for it based upon its own judgment and upon advice from such advisers as it has deemed necessary. Each party is not relying on any communication (written or oral) of the other party as investment advice or as a recommendation to enter into this Transaction; it being understood this information and explanation relating to the terms and conditions of this Transaction shall not be considered investment advice or a recommendation to enter into this Transaction. No communication (written or oral) received from the other party shall be deemed to be an assurance or guarantee as to the expected results of this Transaction.”
776.	UBS relies on the decision of Hamblen J in Standard Chartered Bank v Ceylon Petrol Corporation [2011] EWHC 1785 at [567] that an entire agreement clause incorporating a non-reliance provision took effect as a contractual estoppel preventing the parties relying upon any other non-fraudulent express or implied representations not found in the contract documents.
777.	The relevant clause in that case was a single clause providing that:
“(a) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to its subject matter. Each of the parties acknowledges that in entering into this Agreement it has not relied on any oral or written representation, warranty or other assurance (except as provided for or referred to in this Agreement) and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a party for fraud.”
778.	In this case, in contrast, there are two separate clauses with distinct subject matters. Like the entire agreement clause considered by Rix LJ in Axa Sun Life Services Plc v Campbell Martin Ltd [2011] EWCA Civ 133, [2012] 1 All ER (Comm) 268, clause 9(a) of the ISDA Master Agreement in the present case is not concerned to exclude responsibility for misrepresentations at all. What Rix LJ said at [81] is equally applicable here:
“81. In these circumstances, I would be inclined, subject to authority, to regard cl 24 as being concerned only with matters of agreement, and not with misrepresentation at all. The essence of agreement is that it is concerned with matters which the parties have agreed. The essence of misrepresentation, however, is that it is not concerned with what the parties have agreed, but rather with inaccurate statements (innocently, negligently or fraudulently inaccurate statements) which have been made by one party to the other, have been relied on by the representee in entering into their agreement, and which may give the representee rights to rescind that agreement and/or claim tortious or quasi-tortious damages by reason of loss arising out of entering into the agreement.”
779.	After a review of the authorities on contractual estoppel, Rix LJ concluded at [94] that the entire agreement clause was not capable of excluding liability for any kind of misrepresentation:
“94. In my judgment, this jurisprudence confirms my provisional conclusion on the wording of cl 24. No doubt all such cases are only authority for each clause’s particular wording: nevertheless it seems to me that there are certain themes which deserve recognition. Among them is that the exclusion of liability for misrepresentation has to be clearly stated. It can be done by clauses which state the parties’ agreement that there have been no representations made; or that there has been no reliance on any representations; or by an express exclusion of liability for misrepresentation. However, save in such contexts, and particularly where the word ‘representations’ takes its place alongside other words expressive of contractual obligation, talk of the parties’ contract superseding such prior agreement will not by itself absolve a party of misrepresentation where its ingredients can be proved.”
780.	Further, by contrast with the clause in Standard Chartered Bank v Ceylon Petrol Corporation the non-reliance clause in this case is limited to the exclusion of statements made by way of investment advice or recommendation. In this respect the clause in this case is identical to the clause considered by Hamblen J in the San Marino case [2011] EWHC 484 (Comm), [2011] 1 CLC 701:
“Non-reliance. We are acting for our own account and have made our own independent decisions to enter into this letter and purchase the Notes and as to whether the Note purchase is appropriate or proper for us based upon our own judgment and upon advice from such advisors as we deem necessary. We are not relying on any communication (written or oral) from you as investment advice or as a recommendation to enter into this letter or to purchase the Notes, it being understood that information and explanations related to the terms and conditions of the Notes shall not be considered investment advice or a recommendation to purchase the Notes. No communication (written or oral) received from you shall be deemed to be an assurance or guarantee as to the expected results of the purchase of the Notes.”
781.	Hamblen J’s conclusion at [513] to [515] was that this clause was limited to the exclusion of liability for investment advice or recommendations:
“513. I agree with CRSM that the clause, construed as a whole, is focussing on investment advice and recommendations. It is in this context that the independent decision making referred to in the first sentence falls to be considered. It means independent of any advice or recommendations provided by Barclays. It does not expressly, necessarily or clearly go beyond that. It does not therefore, contrary to Barclays' submission, apply to 'anything which Barclays may have said or omitted to say about the Notes'.
514. The second sentence precludes reliance upon communications as being investment advice or recommendations. In so far as the alleged representations are sought to be so relied upon I agree with Barclays that it has been contractually agreed that they may not be. In such a case CRSM would be contractually estopped from contending that actionable representations had been made thereby, whether under s.2(1) of the [Misrepresentation] Act or for negligent misstatement. 
515. Whether or not the communications are being relied upon as advice or recommendations depends upon the substance of the claim made. On the basis of the misrepresentation case as advanced in closing I would not characterise any of the representations alleged as constituting investment advice or recommendations or as them being so relied upon.”
782.	That reasoning applies equally here. Depfa did not rely on anything said by UBS as investment advice. It recognised that it had to do its own due diligence and make up its own mind whether to enter into this transaction. But it never undertook the risk that those with whom it would be dealing were dishonest to the knowledge of UBS or that UBS knew that the transaction was tainted by a conflict of interest on the part of Value Partners.
783.	UBS submits that the two clauses on which it relies in the present case can be read together, even though they are contained in separate documents. However, reading together two different clauses, neither of which is effective to exclude liability for misrepresentation generally, cannot give those clauses any greater effect than if they were contained in the same document.
784.	Accordingly, these clauses do not assist UBS. In the event that a misrepresentation was made negligently, UBS did not attempt to discharge the burden which lies upon it under section 2(1) of the Misrepresentation Act 1967 of proving that it “had reasonable ground to believe and did believe up to the time the contract was made that the facts represented were true”.
Reliance
785.	I have no doubt that Depfa relied on both misrepresentations in entering into the Depfa Back Swaps. If it had been told that UBS knew that the intermediary advising KWL was dishonest or that the transaction which UBS had already concluded was tainted by a conflict of interest affecting that intermediary, it would have had nothing to do with this proposed deal. I accept the evidence of the Depfa witnesses to this effect. Indeed the reality is that UBS would never have presented the opportunity to Depfa in this way. Rather than make such a disclosure, it would not have pursued the final part of the transaction at all.
786.	UBS suggests that Depfa was aware (because it was reported in the press) that Mr Heininger was under investigation for corruption and had been sanctioned by the supervisory board for misconduct in relation to his expense claims, and therefore that Depfa was not concerned about this and could not have relied on the misrepresentations made by UBS. I reject that suggestion. First, I accept the evidence of the Depfa witnesses that Depfa was not in fact aware of the press articles concerning Mr Heininger. Second, the allegations in the press articles concerning the acceptance of luxury trips and gifts provided in connection with KWL’s conclusion of cross-border lease transactions were of a different order of seriousness from the fact that (to the certain knowledge of UBS in the person of Mr Bracy) Mr Heininger and Value Partners were dishonestly acting together to deceive KWL. Indeed Mr Geoghegan of Depfa could reasonably take the view that by the standards of investment banking the press allegations were no more than a storm in a teacup (see [445] and [446] above). But no sensible person would think that a conspiracy to fabricate false evidence to deceive (in Mr Heininger’s case to deceive his employer and in Value Partners' case to deceive its client) fell into the same category.
Consequences of rescission
787.	It follows from the conclusions reached above that Depfa is prima facie entitled to rescind the two Depfa Back Swaps and to the return of the US $32.6 million paid to UBS on 19 March 2010 (see [525] above). It must also return its intermediation fee. There is no need for any return of premium because the premium was paid directly by UBS to KWL. But that leaves the question, what is to happen to the Depfa Front Swaps? If the Front Swaps are enforceable by Depfa against KWL, a question I have not yet considered, but the Back Swaps have been validly rescinded, that would leave Depfa with an unintended and unjustified windfall.
788.	Recognising this, Depfa does not claim to be entitled to retain any proceeds of the Front Swaps, since but for the misrepresentations of which Depfa complains it would not have entered into them. It points out, however, that it is not obvious what the correct legal analysis in relation to the Front Swaps would be in this situation.
789.	One possibility is that, as KWL asserts, the Front Swaps can be avoided by KWL simply on the basis that Depfa has avoided the Back Swaps as both are part of a single transaction. If that is right, then Depfa cannot obtain any benefit under them and all three parties would be restored to the position in which they would have been if the transaction had not been concluded. Depfa’s witnesses regarded the Front and Back Swaps as a single package, and were of the view that if one fell away, both would fall. Accordingly Depfa does not resist KWL’s assertion but points out, correctly in my view, that the legal basis for it is unclear. In particular it is unclear how Depfa would be able to bring about the rescission of the Front Swaps, on the grounds only that the Back Swaps were invalid, if KWL had wished to maintain them.
790.	If the mere rescission of the Back Swaps does not automatically lead to the rescission of the Front Swaps, and the Front Swaps remain valid, Depfa accepts that it should not retain the benefit of any proceeds of the Front Swaps and confirms that it will have no interest in enforcing the Front Swaps, and in the absence of any obligation to do so, would not intend to. Alternatively, if it is required to enforce the Front Swaps and succeeds in doing so, it would not object to passing on to UBS any proceeds in fact paid to it by KWL, subject to deduction of its costs.  
791.	In my judgment the solution to this potential problem is the consideration, already discussed at [720] above, that rescission is an equitable remedy and that the court has a degree of flexibility in order to ensure that practical justice is achieved. In this case that is easily accomplished by requiring Depfa to undertake, as a condition of its entitlement to rescind the Back Swaps, not to seek to enforce the Front Swaps against KWL. That gives effect to Depfa’s right to rescind as the victim of a fraudulent misrepresentation by UBS. It gives effect to the substance of the position which is that, regardless of the correct legal analysis, the Depfa Front and Back Swaps undoubtedly comprised a single commercial package. It ensures that Depfa does not receive an unjust windfall. And it is an undertaking which, as I understand it, Depfa is willing to give as it does not wish to enforce the Front Swaps independently of any liability which it may have under the Back Swaps.
792.	Despite this, UBS submits that rescission of the Back Swaps is not an available remedy because it cannot be restored to the position in which it would have been if the transaction had not been concluded. This is because, come what may, it has suffered losses on the hedging contracts into which it entered in order to provide the premium, as well to cover its costs and make its  profit. I accept that it has suffered such losses, but do not accept that this means that rescission is not available. In Halpern v Halpern [2007] EWCA Civ 291, [2008] QB 195, a question arose whether rescission for duress was an available remedy in circumstances where full restitution of the pre-contractual position would not be possible. Carnwath LJ gave the example of a builder who had persuaded a householder to pay an excessive amount for roof repairs, either by fraudulent misrepresentation or by a threat. He said:
“74. On the other hand, the example used by a Professor Burrows] -- an illegitimate demand for payment for work carried out -- does point to the difficulty of too rigid a rule. To expand the example, one may imagine someone persuaded by improper means to pay an excessive amount for work done on his house, for example re-tiling of his roof. It is hard to see why it should matter whether the improper means was a threat or a fraudulent misrepresentation. In either case, one would expect the law to find a means to enable him to recover his money, without requiring him to undo the work to the roof. It may be open to debate whether he should be required to give any credit for the value of the work done, assuming it was a value to him. But there could be no justification for any such counter-restitutionary requirement, if the evidence was that the re-tiling had not in fact been needed.
75. It is unnecessary to explore such questions in the context of this case, where the facts are very different. The example shows, perhaps, that for the purposes of “practical justice”, the primary objective may not always need to be to restore both parties to their previous positions. As Professor Treitel has said (in the context of rescission for misrepresentation): 
‘the essential point is that the representee should not be unjustly enriched at the representor’s expense; that the representor should not be prejudiced is a secondary consideration.’ (Treitel, The Law of Contract, 11th ed (2003), p 380, a passage quoted by Burrows, at p 178). 
76. Returning to the question posed by the preliminary issue in this case, a definitive response is not possible or appropriate, until the facts have been found. I would be inclined to agree with the deputy judge that rescission for duress should be no different in principle from rescission for other ‘vitiating factors’. However, the practical effect of counter-restitution, in the terms explained by Lord Blackburn in the Erlanger case 3 App Cas 1218, will depend on the circumstances of the particular case. In the present case, if (contrary to Christopher Clarke J’s expectations) the defendants are able to establish that their consent to the compromise agreement was procured by improper pressure (whether that is characterised as duress or undue influence), it would be surprising if the law could not provide a suitable remedy. The form of the remedy, whether equitable or tortious, is a matter which cannot sensibly be decided until the facts are known, not only as to the nature and effect of the improper pressure, but also as to the identity and significance of the documents destroyed.”
793.	In my judgment that reasoning applies here. Depfa is the victim of a fraudulent misrepresentation by UBS and the primary requirement of practical justice is that it should be restored to its pre-contractual position. Achieving the absence of prejudice to UBS is a secondary consideration. The hedging contracts into which UBS entered have provided no benefit to Depfa, at any rate once Depfa repays its intermediation fee. The fact that UBS will be left with losses on these contracts should not be allowed to prevent rescission of the Depfa Back Swaps. That would be to allow the tail to wag the dog.
794.	I have dealt with this issue here because this particular argument against rescission was most fully developed in the submissions of Depfa and LBBW, but the same reasoning and conclusion would apply equally to any reliance by UBS on its hedging contracts as grounds for preventing rescission of the Balaba STCDO (see [697] to [708] above).
RESCISSION OF THE LBBW BACK SWAP
795.	LBBW advances essentially the same case as Depfa that it was entitled to and has rescinded the LBBW Back Swap for misrepresentation by UBS. Its position is factually different in that the “letter for K” episode occurred after the LBBW transaction had been concluded. However, as I have found that this episode merely confirmed what Mr Bracy already knew about Value Partners’ dishonesty, this difference does not affect the overall analysis. Another difference, to the extent that Mr Sanz-Paris's knowledge is relevant, is that some aspects of his knowledge arose only after the LBBW transaction had been concluded. These included his knowledge of the press allegations about Mr Heininger and whatever was or was not said about this issue during the safari trip and the request for the "transaction overview". However, this need not be further explored because the knowledge of Mr Bracy is sufficient for LBBW’s purposes. In other respects LBBW is in materially the same position as Depfa so far this aspect of the case is concerned.
796.	LBBW formulates the representations for which it contends as follows:
a.	that UBS would have entered into the LBBW Front Swap directly if it had had any further or sufficient available internal lines of credit authorisation;
b.	that the intermediation opportunity being proffered to LBBW was a proper and/or legitimate commercial opportunity;
c.	that UBS had no significant doubts and no reason to have significant doubts that KWL or those acting for it in connection with the LBBW Front Swap were honest, had a proper and appropriate commercial relationship with UBS and/or one another and were appropriate parties for a bank to deal with and appropriate counterparties for a bank entering into transactions of this kind;
d.	that UBS was not aware of the existence of any reasons why the LBBW Front Swap would or might be unenforceable; and/or
e.	that UBS was “comfortable” that there was no risk that KWL would be acting ultra vires in entering into the LBBW Front Swap.
797.	As with Depfa, I accept that the first of these representations was made and, also as with Depfa, it was true. The fifth representation reflects a comment made by Mr Davies of UBS in his e-mail dated 23 August 2006 (see [417] above). This representation was also true and I have found that the Balaba transaction was not ultra vires, while the Leipzig Court has found that the LBBW Front Swap was not ultra vires either. Accordingly I do not propose to consider these representations further. 
798.	The second, third and fourth of these representations are similar to those formulated by Depfa, and in some respects go further than I have been prepared to find in the case of Depfa. However, they contain within them what I have called the "no knowledge of dishonesty" and "no knowledge of taint" representations, and for the same reasons as in the case of Depfa I am satisfied that these representations were made, were false, and were made dishonestly (so far as Mr Bracy was concerned) with the intention that LBBW should rely upon them. Mr Bracy was fully involved in the LBBW transaction (see [408] above) just as he was subsequently involved in the Depfa transaction. I accept also the evidence of the LBBW witnesses, in particular Mr Northway, that LBBW did rely upon them. If LBBW had known the true position, it would have had nothing to do with this transaction. Indeed, although the later and less serious press allegations concerning Mr Heininger gave rise to different views within LBBW, they were at least a significant factor in LBBW’s decision not to participate in further transactions regarding the Merrill Lynch and MBIA bonds (see [478] and [479] above). As with Depfa, UBS relies on entire agreement and non-reliance clauses, but this reliance is ill founded for the same reasons as already discussed above.
799.	LBBW accepts that on rescission of the Back Swap it must return its intermediation fee of €2 million. Subject to the complication that its claim under the Front Swap is before the German courts and that this court has no jurisdiction in relation thereto, LBBW is in the same position as Depfa in not wishing to seek any windfall recovery under the Front Swap in the event that it is entitled to rescission of the Back Swap. The formulation of an undertaking not to enforce the Front Swap may need to reflect damages claims which LBBW seeks to pursue against UBS, for example for any costs of the proceedings against KWL in Germany which it is unable to recover there. Such claims are not presently before me. In principle, however, there is no reason why LBBW should not give a similar undertaking to Depfa as a condition of rescission of the Back Swap and, as I understand it, LBBW is willing to do so.
THE DEPFA FRONT SWAPS
800.	I deal next with Depfa’s claim to enforce the Depfa Front Swaps, although this issue and indeed all remaining issues to be dealt with in this judgment will not arise if the conclusions reached so far are correct and the undertakings not to enforce the Front Swaps are given by LBBW and Depfa. However, these remaining issues were fully argued and I should express my conclusions and essential reasoning upon them, although I will attempt to do so without further lengthening this already lengthy judgment more than is absolutely necessary.
801.	KWL resists liability under the Depfa Front Swaps on three grounds:
a.	The first is that the Front and Back Swaps formed part of the same transaction, and that the entire transaction was affected by UBS’s misrepresentations to Depfa; the consequence, according to KWL, is that the entire transaction falls as a result of Depfa’s rescission of the Back Swaps.
b.	The second is that because Depfa did not itself undertake any negotiation process with KWL but simply took over the transaction already arranged by UBS, it effectively treated UBS as its agent for the negotiation of the STCDO transactions and implicitly ratified all that UBS had done.
c.	The third is that the Depfa Front Swaps represented an abuse of the power of representation of KWL’s managing directors just as much as the Balaba STCDO and for the same reasons, and that Depfa was itself grossly negligent if it failed to realise that this was so.
Single transaction
802.	As already noted at [789] above, Depfa’s witnesses regarded both swaps as a single package and as Depfa does not seek to profit from the Front Swap in the event of rescission of the Back Swap, it has no interest in resisting KWL’s first ground. However, the two swaps are separate contracts involving different parties and were deliberately structured in this way. In those circumstances I agree with Mr Railton for Depfa that the legal basis on which the Front Swap would fall away as a result of rescission of the Back Swaps is not clear. It is possible to imagine circumstances in which an intermediary bank would wish to rescind the Back Swaps while a client in the position of KWL might wish to maintain the Front Swap. That could occur, for example, if in the days before the financial crisis the client took the view that losses under the STCDO would not occur and was anxious to retain an attractive premium. Accordingly I would not have upheld KWL’s first ground of resistance to Depfa’s claim under the Front Swaps.
Agency
803.	KWL submits that where a party A negotiates the terms of an agreement with another party B and in the course of so doing pays a bribe or realises that an adviser to B is not acting in B’s interests, it cannot be right that A should be able to avoid the consequences by interposing an unsuspecting intermediary C into the transaction to be B’s counterparty. It says that this outcome is to be avoided by treating A as the agent of C for the purposes of negotiating the transaction, so that upon concluding the transaction C ratifies A’s actions, enabling B to rely upon the bribe and knowledge of a conflict of interest as against C as well as A. It cites Briess v Woolley [1954] AC 333 and Cramaso v Ogilvie-Grant [2014] UKSC 9, [2014] 2 WLR 317 in support of that analysis.
804.	I have already considered, albeit in a different context, the requirements for the creation of an agency relationship (see [594] and [595] above). Applying these principles, it is difficult to characterise the relationship between UBS and Depfa as a relationship of agency, at any rate in which UBS was the agent and Depfa the principal. Rather they were acting on opposite sides of the Back Swap contract, with UBS describing itself as the arranger of the transaction for KWL (see [488] above). Moreover, although from a commercial point of view it might have made sense to speak of UBS carrying out the later parts of the transaction through intermediaries, it was always understood that the reason why this was necessary was that UBS was not willing to contract with KWL directly and accordingly that all three parties, UBS, KWL and the intermediary bank, would contract as principals.
805.	Furthermore it is unnecessary to characterise UBS as the agent of Depfa for the purpose of rendering Depfa responsible for the conduct of UBS, when KWL has, as I have already held, a perfectly good remedy against UBS. Thus one consequence of the bribery of Mr Heininger for which UBS is responsible and the Value Partners conflict of interest of which UBS was aware is that KWL is entitled to damages from UBS the effect of which will be to indemnify it against any liability to Depfa on the Front Swaps (see [716] above).
806.	I do not accept that KWL’s agency analysis is required by the cases on which it relies. In Briess v Woolley fraudulent representations made by the managing director of one company were held to be actionable against a shareholder in the company because the shareholders had appointed the managing director as their agent to continue and complete the negotiation of a sale of their shares to the representee. Although the misrepresentation had been made before the managing director's appointment as the shareholders' agent, it had a continuing effect right up until the conclusion of the sale. In Cramaso v Ogilvie-Grant a representation was made to an individual who subsequently decided to conclude the contract using a newly formed partnership. It was held that on the facts the parties had proceeded with the negotiation and conclusion of the contract on the basis that the accuracy of the representation continued to be asserted by the representor, implicitly if not expressly, after the identity of the prospective contracting party had changed and that it had continued to have a causative effect, so as induce the conclusion of the contract with the new partnership. In neither case was there any need for an artificial agency analysis such as KWL relies upon in the present case. 
Evident abuse
807.	KWL’s third ground for resisting liability under the Depfa Front Swaps is that Supervisory Board approval was required for these transactions just as it was for the Balaba STCDO, and that Depfa was guilty of gross negligence in failing to realise this, with the consequence that the Front Swaps are void for lack of capacity. I have already dealt with the applicable legal tests and have concluded that Supervisory Board approval was required in the case of the Balaba STCDO. There is no reason to reach a different conclusion on that point in the case of the Depfa Front Swaps. Accordingly the issue is whether Depfa was guilty of gross negligence in the demanding sense required by German law. This issue is concerned with Depfa’s own conduct, principally that of Mr Wiehler, the Depfa lawyer responsible for this transaction. On this issue KWL does not contend that any negligence of UBS is to be attributed to Depfa, although in any event I have found that UBS was not grossly negligent in relation to the Balaba transaction.
808.	Although there are many similarities between the factual position of UBS in relation to the Balaba transaction and the position of Depfa, there are two important differences. The first is that, as a result of the Balaba and LBBW transactions, Depfa was dealing with a situation in which KWL had already concluded two very similar previous STCDOs which it was given to understand had been notified to the KWL Supervisory Board without objection. It was entitled in my view to take some comfort from this. The second is that Mr Wiehler on behalf of Depfa did apply his mind to the specific question whether Supervisory Board approval for the transaction was required and raised this expressly with Freshfields, whereas Mr Lancaster for UBS had focused primarily on other issues. KWL relies on this, submitting that having raised the issue in this way, Mr Wiehler was negligent in failing to insist that the issue should be conclusively resolved, either by a Supervisory Board resolution approving the transaction or by an unequivocal statement by Freshfields that such approval was not required under KWL’s Articles.
809.	It is true that the information provided by UBS to Depfa changed dramatically in the course of the negotiations. First UBS told Depfa that KWL had board approval for the transaction (see [481] above). Then it sent a copy of the Supervisory Board minute of the 7 September 2006 meeting which merely took note of a presentation by Mr Heininger ([484]). It appears that Mr Wiehler was under the impression, right up until early March 2007, that Supervisory Board approval existed. His question at that stage was not whether it was necessary, but whether it was sufficient ([500] and [501]). At this stage, Mr Lancaster realised that Supervisory Board approval had not been given and changed tack, requesting Freshfields to include a statement in their opinion that this was not necessary ([502]). Mr Wiehler also requested Freshfields to address this issue in their opinion, and it was this which led to the telephone conversation of 6 March 2007 with Dr Reichert-Facilides ([505] to [510]). I have found that the result of that conversation was not, as KWL contends, that Freshfields told Mr Wiehler that they were not prepared to say that Supervisory Board approval was not required and that in those circumstances Depfa would have to make a commercial decision whether it wished to proceed, but that Freshfields told Mr Wiehler that Depfa did not need to concern itself with whether Supervisory Board approval was required and that it was for this reason that the topic would not be dealt with in the opinion. As a German lawyer himself, Mr Wiehler was very familiar with the concept that a third party contracting with a company need not enquire into the authority of the managing directors and is entitled to proceed on the basis that they have authority in the absence of massive or solid grounds for suspecting otherwise.
810.	Ultimately, therefore, despite the initial muddle about whether Supervisory Board approval existed, Mr Wiehler was reassured by Freshfields on this issue. Even if the reason for Freshfields' reluctance to address the issue of Supervisory Board approval in their opinion was their own uncertainty on the point (see [333] above), a matter on which I make no finding one way or the other, Mr Wiehler had no way of knowing this. Certainly his conduct can be criticised in some respects, as he himself admitted. He did not discuss his conversation with Dr Reichert-Facilides internally within Depfa as he had said he would ([507]). He omitted to obtain a signed copy of the final Freshfields opinion ([512]). He never obtained a copy of KWL’s Articles, despite having asked for them several times ([513]). And he never quizzed Mr Lancaster about the changes in the information provided to Depfa. 
811.	However, these were in the end peripheral matters. The fact is that Mr Wiehler had Freshfields' agreement to the terms of an opinion materially to the same effect as that given to UBS and LBBW and he had been expressly advised by Freshfields that Depfa need not be concerned with the issue whether Supervisory Board approval for the transaction had been obtained. In these circumstances I consider that the need for Supervisory Board approval was not obvious and that Mr Wiehler cannot be regarded as grossly negligent for failing to realise that in fact such approval was essential to the validity of the transaction. 
Conclusion
812.	For these reasons, in summary, I would if necessary have held that Depfa was entitled to enforce the Front Swaps against KWL. 
CONSTRUCTION OF THE LBBW AND DEPFA BACK SWAPS
813.	It is convenient to deal next with an issue of construction of the Back Swaps which is common to LBBW and Depfa, but on which LBBW and Depfa take different positions. The clause in question is clause 6 of the Back Swaps Confirmation which in each case provided as follows (with emphasis added):
“The occurrence of an early termination in respect of the Portfolio Swap shall constitute an Additional Termination Event, in respect of which (i) both parties shall be Affected Parties; (ii) this Transaction shall be the sole Affected Transaction; (iii) the early termination date in respect of the Portfolio Swap will be deemed to be the Early Termination Date designated as a result of this Additional Termination Event; and (iv) for purposes of Section 6(e) of the Agreement (A) where an amount is paid by Counterparty to Kommunale Wasserwerke Leipzig GmbH under the Portfolio Swap, an amount shall be payable by UBS to Counterparty under this Transaction equal to that amount and (B) where an amount is paid to Counterparty under the Portfolio Swap, an amount shall be payable by Counterparty to UBS under this Transaction, equal to that amount.”
814.	In a nutshell, the issue is whether the italicised words mean that in the event of an Early Termination of the Front Swap, liability to UBS under the Back Swap exists (a) only when and to the extent that KWL actually makes payment under the Front Swap (LBBW’s construction), (b) to the extent that KWL is obliged to make payment under the Front Swap whether or not it actually does so (Depfa’s construction), or (c) regardless of whether KWL has a defence to any claim for payment under the Front Swap (UBS's construction). It could therefore be said, more succinctly, that LBBW’s case is that "paid" means "paid"; Depfa’s case is that "paid” means "payable"; and that UBS’s case is that "paid” means "calculated and payable on the assumption that the Front Swap is valid and enforceable whether or not it actually is”. Although LBBW’s primary case is that “paid” requires actual payment, in the alternative it adopts Depfa’s case that “paid” means that there must be an obligation to pay.
The purpose of clause 6
815.	The purpose and meaning of the rather dense language of clause 6 require some explanation for those who are not familiar with the ISDA Master Agreement and perhaps even for those who are. That standard form agreement provides for Early Termination of a contract in some circumstances, including most notably a default by a counterparty who is unwilling or unable to pay when a payment falls due. When that occurs, the contract is terminated, a calculation is carried out in accordance with whatever method of calculation the parties have chosen, essentially representing the mark-to-market valuation of the parties' payment obligations at the Early Termination Date, and the resulting figure is due to whichever party is in the money. 
816.	The purpose of clause 6 was to provide that in the event of Early Termination of the Front Swap, the Back Swap would also terminate, thus maintaining the back-to-back nature of the two contracts. It did this by providing that Early Termination of the Front Swap (defined as “the Portfolio Swap”) would constitute an “Additional Termination Event” under the Back Swap, with the same Early Termination Date and the same amount payable under each swap. That the amount would be the same was further ensured by a provision that for each swap UBS would be the "Calculation Agent". The clause represents, therefore, a special regime under the Back Swap applicable only in the event of Early Termination of the Front Swap. The circumstances in which it would be most likely to be invoked were where KWL failed to make a payment which was due under the Front Swap, which in turn was most likely to happen in the event of KWL becoming insolvent. Because of the calculation methods which apply under the ISDA Master Agreement, the calculation which would then be required might result in an amount due to KWL under the Front Swap (situation “(A)” in clause 6) or might result in an amount due to the intermediary bank (situation “(B)”). 
The background
817.	There was no dispute as to the general principles of construction which must be applied in order to determine the meaning of clause 6. They are set out in cases such as Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 and The Rainy Sky [2011] UKSC 50, [2011] 1 WLR 2900 and are well known. In outline, the clause has to be viewed in the context of the contract as a whole and given the meaning which it would convey to a reasonable person having all the background knowledge reasonably available to the parties in the situation in which they were at the time of the contract. Where as a matter of language a clause is capable of more than one meaning, it is appropriate to have regard to considerations of commercial common sense in resolving the question what a reasonable person would have understood the parties to have meant. Indeed the literal meaning of a clause may have to be rejected if its adoption would be contrary to business common sense or would defeat the object of the contract.
818.	The principal element of background which is relevant to this issue of construction is that the intermediary banks in each case were intended to take the credit risk of KWL as UBS had used all of its credit line with KWL. As UBS explained the matter to both LBBW and Depfa, that was the purpose of involving intermediary banks when UBS would otherwise have contracted directly with KWL. There was some debate as to what was meant by "credit risk", a term which was not contained in the contract but which was used by the parties in their negotiations. Although I would accept that the meaning of this expression will depend on the context, and that a wider meaning is sometimes possible, in the present context it refers to a party’s (i.e. KWL’s) failure to meet its financial obligations and does not extend to the risk of non payment in circumstances where (for example, because the Front Swap is void or has been validly avoided) there is no obligation to pay.
The payment regime in the absence of Early Termination
819.	As already noted, clause 6 applies only in the event of Early Termination of the Front Swaps. Unless and until that occurs, while the Front Swaps continue in force the parties' payment obligations under the Back Swaps are contained in other clauses, principally in clause 3 of each confirmation. Clause 3 provides:
“Floating Payment 
Floating Amount: The Counterparty shall pay to UBS, on each Portfolio Swaps Floating Payment Date the related Equivalent Portfolio Swaps Floating Amounts.” 
820.	This requires reference to a number of definitions. The “Counterparty” and also the “Floating Rate Payer” is LBBW or Depfa as the case may be. The “Portfolio Swaps Floating Payment Date” means “each date that a Floating Amount is due and payable by [KWL] to [LBBW or Depfa] pursuant to and in accordance with” the Front Swap. The "Equivalent Portfolio Swaps Floating Amounts" means, for each such date, “an amount determined by [UBS] equivalent to the amount payable by [KWL] to [LBBW or Depfa] pursuant to and in accordance with” the Front Swap on the "Portfolio Swaps Floating Payment Date”.
821.	What all this means when the various definitions are given effect is that LBBW or Depfa is only under any obligation to make a payment to UBS under the Back Swap when the same amount is “due and payable” to it by KWL under the equivalent Front Swap. In other words, clause 3 cannot apply if no payment is due and payable by KWL to LBBW/Depfa. Thus the intermediary bank’s payment obligations depend on sums being due and payable under the Front Swaps and, therefore, on the validity and enforceability of those Swaps. If the Front Swaps are invalid and unenforceable, nothing is due and payable under them and therefore nothing is due and payable under the Back Swaps.
822.	That this is how the Back Swaps are intended to operate is clear from several clauses which would otherwise be unworkable. Accordingly, during the continuation of the Front Swaps and in the absence of Early Termination, there is no doubt in my judgment that the intermediary bank's obligation is to pay UBS whatever amount is due and payable by KWL. If KWL has no obligation to pay the intermediary bank, the intermediary bank has no obligation to pay UBS. If KWL does have an obligation to the intermediary bank, the intermediary bank has a corresponding obligation to UBS regardless of whether KWL has actually made payment. 
823.	So far, this is common ground between LBBW and Depfa, but is disputed by UBS who contends that the purpose of the references in the Back Swaps to amounts which are due and payable under the Front Swaps is merely to enable a calculation of the amount to be made and says or implies nothing about whether anything is actually due and payable under the Front Swaps. UBS supports its construction by reliance on three matters which, it says, constitute relevant background.
824.	First, it submits that the risk of invalidity of the Front Swaps was so obviously a risk attaching to the Front Swaps not the Back Swaps that in the absence of unequivocal agreement to the contrary it was a risk for LBBW and Depfa to bear, not UBS. I do not accept this. These were transactions which UBS had arranged and which it presented to the intermediary banks. It is not self-evident that the each of the intermediary banks should bear the risk that the transactions were fundamentally flawed in some way. If the Front Swaps were flawed, this was much more likely to be by reason of something for which UBS (not LBBW or Depfa) was responsible. In any event, this consideration cannot override the clear terms of the Back Swaps.
825.	Second, UBS relies on evidence given by Mr Northway of LBBW, who had other experience of STCDO intermediation transactions, that if an intermediating bank wishes not to bear a particular risk of facing a counterparty (here, the risk as between the intermediary bank and UBS of invalidity of the Front Swaps) it would need to raise that in negotiations and specifically exclude it. However, I do not regard that opinion evidence as being of any relevance to an issue of construction. In any event, if UBS put forward contract wording which indicated that it would bear the risk of invalidity of the Front Swaps (as in my view it did), the point put to Mr Northway goes nowhere.
826.	Third, UBS relies on the fact that both LBBW and Depfa obtained opinions from Freshfields addressing issues of KWL’s capacity and issues such as the authority of KWL’s managing directors to sign on its behalf. That demonstrates, according to UBS, that it was LBBW and Depfa who were understood to be bearing the risk of the Front Swap being invalid. I do not accept this argument. Even assuming this to be a matter of relevant background, the fact that LBBW and Depfa obtained opinions from Freshfields does not necessarily mean that, as against UBS, they were accepting liability under the Back Swaps even if the Front Swaps were invalid. It would in any event have been sensible for them, for example from a reputational point of view, to take appropriate steps to ensure the validity of the Front Swaps into which they were to enter and which (if KWL failed to pay) it would be for them, not UBS, to enforce. Again, however, and in any event, this consideration cannot override the clear meaning of the contract. 
827.	In my judgment UBS’s construction is untenable. It would require substantial rewriting of the contract.
The payment regime in the Event of Early Termination
828.	If (as I hold) the intermediary bank's obligation is to pay UBS whatever amount is due and payable by KWL during the currency of the contract, the question then arises whether clause 6 means that an entirely different payment regime is intended to operate in the event of Early Termination of the Front Swaps. As I understand it, UBS does not suggest this. Its case is that payment is due under the Back Swaps regardless of KWL’s liability under the Front Swaps whether or not there is an Early Termination. I have rejected that case. But LBBW (although not Depfa) does contend that Early Termination of the Front Swaps makes all the difference, and that once it occurs, the intermediary bank is only obliged to pay UBS upon actually receiving payment from KWL. Thus in the present case, even if KWL is under an obligation to pay LBBW as the Leipzig Court has held, LBBW is so far under no obligation to UBS (save perhaps for an obligation to sue KWL) because so far KWL has not discharged its obligation.
829.	The consequences of LBBW’s construction are very striking. They would mean, as LBBW accepted, that in the event of an Early Termination, the intermediary bank was not taking the credit risk of KWL even though the insolvency of KWL was one of the typical situations which could result in Early Termination of the Front Swaps. Thus in the very situation where an intermediary bank would be needed, because UBS was not prepared to take the credit risk and had made this clear to LBBW and Depfa, the Back Swap would have failed to achieve its purpose.
830.	LBBW does not shrink from accepting these consequences and acknowledges that they mean that one objective of the transaction, namely that the intermediary bank should take the KWL credit risk, will not have been achieved. But it counters this objection to its construction by contending that it was an equal objective of the transaction that the intermediary bank should not take the market risk -- in other words, that the intermediary bank should not be left in a situation where it is liable to UBS without having recovered from KWL. I do not accept this. Certainly the contracts were intended to be back-to-back, but the whole purpose of the three party structure was that the intermediary bank should contract as a principal and should bear the credit risk of KWL. It was for this that the intermediary banks earned their fees. Moreover, even LBBW accepts that the intermediary banks did take the market risk in the case of payments falling due from KWL before an Early Termination.
831.	There is nothing in clause 6 of the Back Swap confirmations to suggest that a fundamental reallocation of risk was intended in the event of an Early Termination of the Front Swaps. While the literal wording of the clause suggests that payment is only due to UBS once an equal amount has been "paid" by KWL to the intermediary bank, that is plainly not the intended meaning of the clause. So to construe the clause would defeat the object of the contract. The problems to which I have referred fall away if the word "paid" is understood to mean "payable", as Depfa submits that it should be. That is in my judgment a permissible construction and I hold that it is correct. Although the construction of each clause depends on its own context, I note that there is at least one case of the highest authority where the phrase "actually paid" has been held not to require actual payment (Charter Reinsurance Co Ltd v Fagan [1997] AC 313).
832.	If necessary, I would apply the principle of “correction of mistakes by construction” discussed by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101. He described it in these terms:
“22. In East v Pantiles (Plant Hire) Ltd (1981) 263 EG 61 Brightman J stated the conditions for what he called “correction of mistakes by construction": 
‘Two conditions must be satisfied: first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction.’
23. Subject to two qualifications, both of which are explained by Carnwath LJ in his admirable judgment in KPMG LLP v Network Rail Infrastructure Ltd [2007] Bus LR 1336, I would accept this statement, which is in my opinion no more than an expression of the common sense view that we do not readily accept that people have made mistakes in formal documents. The first qualification is that ‘correction of mistakes by construction’ is not a separate branch of the law, a summary version of an action for rectification. As Carnwath LJ said (at p. 1351, para 50): 
‘Both in the judgment, and in the arguments before us, there was a tendency to deal separately with correction of mistakes and construing the paragraph ‘as it stands’, as though they were distinct exercises. In my view, they are simply aspects of the single task of interpreting the agreement in its context, in order to get as close as possible to the meaning which the parties intended.’
24. The second qualification concerns the words “on the face of the instrument". I agree with Carnwath LJ (at pp 1350-1351) that in deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context. As the exercise is part of the single task of interpretation, the background and context must always be taken into consideration. 
25. What is clear from these cases is that there is not, so to speak, a limit to the amount of red ink or verbal rearrangement or correction which the court is allowed. All that is required is that it should be clear that something has gone wrong with the language and that it should be clear what a reasonable person would have understood the parties to have meant. In my opinion, both of these requirements are satisfied.” 
833.	If clause 6 is to be read literally as requiring actual payment, that is an obvious mistake having regard to the background and context of the contractual document. It is clear that what the parties meant was “payable”.
834.	LBBW recognises that a construction which means that it need do nothing in the event of Early Termination unless and until it is paid by KWL can hardly have been intended. It therefore suggests that in the event of non-payment by KWL, it would be obliged to sue KWL to enforce the Front Swap. That would have to be an implied obligation owed to UBS as there is no such express obligation in the Back Swap. But it involves considerable difficulties. How far would LBBW be required to pursue such proceedings? Who would be entitled to decide whether to accept any offer of settlement? And so on. Rather than attempting to solve such problems by an artificial process of implying terms, I consider that the natural construction is that LBBW's obligation is to pay UBS whatever amount is due and payable by KWL both during the currency of the contract and in the event of Early Termination of the Front Swaps.
Conclusion
835.	If necessary, I would have held that as a matter of construction of the Back Swaps, the liability of the intermediary banks to UBS in the event of Early Termination of the Front Swaps is dependent on KWL being liable to the intermediary banks under the Front Swaps but does not depend on payment being made by KWL.
RECTIFICATION OF THE BACK SWAPS
836.	If necessary, and in the alternative to its case on construction, UBS claims rectification of the LBBW and Depfa Back Swaps so as (in summary) to leave LBBW and Depfa with the credit risk and validity risk of KWL; in the further alternative it says that LBBW and Depfa are each estopped from denying that they bear these risks.
Rectification and estoppel – the law
837.	There is no dispute as to the requirements for a case of rectification to succeed (although as a separate point, LBBW submits that even if they are satisfied here, rectification is an equitable remedy which should be refused on the ground of UBS’s “unclean hands”). They were affirmed by Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd at [48], approving the summary by Peter Gibson LJ in Swainland Builders Ltd v Freehold Properties Ltd [2002] 2 EGLR 71 at [33]:
“The party seeking rectification must show that: 
(1)  the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;
(2)  there was an outward expression of accord;
(3)  the intention continued at the time of the execution of the instrument sought to be rectified;
(4)  by mistake, the instrument did not reflect that common intention.”
838.	The test is an objective one. What matters is what an objective observer would have thought the intentions of the parties to be, not their uncommunicated subjective intentions: Chartbrook at [60] to [66]. Convincing proof is required to counteract the cogent evidence of the parties’ intention as displayed by the contract itself.
839.	There is likewise no dispute as to the principles of estoppel by convention, which were stated by Lord Steyn in The Indian Grace (No. 2)  [1998] AC 378 at 913:
“It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: K. Lokumal & Sons (London) Ltd. v Lotte Shipping Co Pte Ltd. [1985] 2 Lloyd's Rep. 28; Norwegian American Cruises A/S v Paul Mundy Ltd [1988] 2 Lloyd's Rep. 343; Treitel, The Law of Contract, 9th ed. (1995), pp. 112-113. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention.”
The rectification sought by UBS
840.	UBS’s pleaded case is that clause 6 of the Back Swap confirmations with both LBBW and Depfa should be rectified so as to provide that:
“For the purposes of Section 6(e) of the Agreement (A) where an amount can be calculated as being due from [LBBW or Depfa] to [KWL] under the terms of the Portfolio Swap, an amount shall be payable by [UBS] to [LBBW or Depfa] under this Transaction, equal to that amount and (B) where an amount can be calculated as being due to [LBBW or Depfa] under the terms of the Portfolio Swap, an amount shall be payable by [LBBW or Depfa] to [UBS] under this Transaction, equal to that amount”.
841.	The words underlined represent the changes for which UBS contends.
842.	As LBBW and Depfa point out, rectification limited to clause 6 would deal only with the situation of Early Termination of the Front Swaps, leaving intact the payment regime applicable during the currency of the contract. But a payment regime which distinguishes between Early Termination of the Front Swaps and other situations is not in fact the case which UBS wishes to make. Accordingly, in order to give effect to the case which it wishes to make, that LBBW and Depfa should bear the risk of invalidity of the Front Swaps regardless of Early Termination, UBS suggested in closing that if necessary further clauses of the Back Swaps should also be rectified: that the reference to sums being “payable” by KWL under the definition of Portfolio Swap and/or under clauses 2 and 3 of the confirmations should be replaced with the same underlined wording as proposed for clause 6 and, again if necessary, the reference to the “Portfolio Swap” should be supplemented by adding the words “or purported Portfolio Swap”.  
843.	This is all rather convoluted and illustrates the extensive re-writing of the contract which would be required to give effect to UBS’s case. Although the extensive nature of such re-writing is not necessarily fatal to a rectification claim, it is a relevant consideration. The contract represents strong evidence of the parties’ intentions. The more extensively it is required to be rewritten, the less likely it is that the party seeking rectification will be able to provide convincing proof to counteract that evidence. 
844.	For the reasons given below the matters relied on by UBS fall far short of providing the necessary convincing proof. As I reach that conclusion having regard to the matters which crossed the line between the respective parties, I do not propose to consider the extensive evidence relied on by UBS as showing the subjective beliefs of LBBW and Depfa respectively that they were to bear the validity risk of the Front Swaps. Although UBS is able to point to some such evidence, on the whole that appears to me to be inconclusive and, if I am right in concluding that there was no outward expression of any such agreement, such evidence will not assist UBS in any event.
Rectification of the LBBW Back Swap
Credit risk
845.	It is convenient to consider separately the issues of credit risk and validity risk. The effect of my decision on construction is that LBBW does bear the credit risk of KWL, at any rate using "credit risk" in the sense of risk that KWL would fail to meet its obligations. This is so, not only during the currency of the Front Swaps (as LBBW accepts), but also in the event of their Early Termination. I have reached that conclusion by construing the word "paid" in clause 6 of the Back Swap as meaning "payable". Accordingly this aspect of UBS’s claim does not arise.
846.	In the event, although UBS submits as part of its rectification case that LBBW was to bear the credit risk of KWL, it has not formally advanced a claim for rectification of the Back Swap to give effect to this independent of its case on the validity risk. Thus it has not formally pleaded that, if LBBW’s construction of clause 6 is correct, the LBBW Back Swap should be rectified by the simple replacement of the word “paid” in clause 6 with “payable”. However, I should record that if it is not a legitimate conclusion as a matter of construction that “paid” in clause 6 means “payable”, I would have been willing to reach the same result by way of rectification. It was always the mutually expressed intention of the parties that LBBW should bear the credit risk of KWL. That was indeed the purpose of involving LBBW as an intermediary between UBS and KWL. This appears from the way in which UBS first described the transaction to LBBW (see [409] above) and the way in which the negotiations then developed, right through to LBBW’s express acknowledgment on 6 September 2006 that it was taking the credit risk of KWL ([433] above). Mrs Schmidt of LBBW accepted in her evidence that this exchange shows that both parties were proceeding on the basis that the credit risk of KWL was being taken by LBBW. I agree.
847.	The only reason why LBBW now suggests that it should not bear this credit risk in the event of Early Termination of the Front Swap is the language of clause 6 of the confirmation discussed above. However, although the clause with this wording was included in the draft contracts from the very beginning, nobody focused on it during the parties' negotiations and even the LBBW witnesses admitted candidly that they only noticed its potential significance after the event. It is clear, in my judgment, that if (contrary to my decision above) clause 6 is to be construed as contended for by LBBW, the clause fails to reflect accurately the parties' common and mutually expressed intention.
848.	I would add for clarity that UBS submits (and on occasions suggested to LBBW witnesses) that the expression "credit risk" extended to cover any failure by KWL to make payment under the Front Swap, even if no such payment was due, for example because the Front Swap was void for want of capacity or had been validly avoided. Although UBS was able to point to some documents, including some definitions in LBBW’s own published accounts, which suggest that the expression "credit risk" may sometimes be used in this wider sense, that is clearly not the sense in which it was used in the message of 6 September 2006. If "credit risk" covered non-payment for any reason, it would not have made sense for LBBW to say that it would be left “only” with the credit risk. Indeed the way in which UBS’s submissions deal separately with credit risk and validity risk implicitly recognises that "credit risk" is being used in the narrower sense of failure to meet an obligation. If “credit risk” covered everything, there would be no need to discuss “validity” or “ultra vires” risk separately.
Validity risk
849.	So far as validity risk is concerned, UBS relies on the exchanges on 22 and 23 August 2006 as showing that the parties’ intention was that LBBW would be liable under the Back Swaps even if the Front Swaps were invalid or avoided (see [414] to [424] and [436] above). However, while the issue was raised in the parties’ negotiations, my findings set out in those paragraphs mean that there was no common continuing intention or outward expression of accord that the validity risk would be borne by LBBW. The parties were in fact unable to agree about this issue and left it that LBBW would obtain an opinion from Freshfields. They did not agree (as UBS submits) that LBBW needed to get an opinion from Freshfields, merely that LBBW would in fact do so. It is possible that they envisaged that, once LBBW had done so, the topic of validity risk might be revisited but, if they did, that never happened. Each party may have hoped that it had said or done enough to shift the risk onto the other if the point was not raised again. It seems inconceivable, however, that either party thought that the other had actually agreed that it would bear the risk about which they had been arguing in the emails leading up to the 23 August 2006 telephone conversation. If they had, that would have been an important point which would certainly have been confirmed in writing following the conversation.
850.	UBS’s claim for rectification, together with its equivalent reliance on an estoppel by reason of essentially the same matters, therefore fails on the facts. It is unnecessary to consider LBBW’s argument concerning “unclean hands”: since the claim for rectification will only matter if (contrary to my conclusions) (a) LBBW is not entitled to rescind the Back Swap for misrepresentation by reason of UBS’s knowledge of the dishonesty of Value Partners and/or the tainted nature of the transaction and (b) a case of rectification is made out on the facts, the factual scenario in which any issue of “unclean hands” would arise is not clear.
The Novation Agreement
851.	It is unnecessary also to consider in any detail an argument by LBBW that any claim by UBS for rectification or reliance on principles of estoppel must fail because the original transaction (which was entered into between LBBW and UBS Limited) was subsequently novated, by a written novation agreement entered into between UBS Limited, UBS AG and LBBW and dated 8 May 2009, so as to be between UBS AG and LBBW. LBBW submits that the effect of the novation was to release and discharge the parties from their existing obligations and to create an entirely new contract.
852.	Had it been relevant, I would have rejected that argument. If the rights and obligations of the parties which were novated to UBS AG had been subject to a right to rectification of the contract, so too were the rights and obligations under the new contract. Any other conclusion would defeat the obvious intentions of the parties. Indeed, LBBW accepts that the novated 2009 contract should be construed against the background of the original 2006 contract. I see no reason why the same reasoning should not apply to any issue of rectification or estoppel.
Rectification of the Depfa Back Swaps
853.	UBS relies on the following matters (in outline) as showing that the parties’ intention was that Depfa would be liable under the Back Swaps even if the Front Swaps were invalid or avoided:
a.	first, that save on one specific point, UBS refused a request by Depfa for an indemnity ([485] to [487]);
b.	second, that UBS made clear that as Depfa was to be facing KWL, it was responsible for carrying out its own due diligence on KWL (see [488] and [493] above); and
c.	third, that Depfa indicated that it would regard an opinion from a law firm as to KWL’s capacity as providing it with sufficient comfort on KWL’s capacity to enter into the transaction ([491]), which opinion Depfa duly obtained from Freshfields.
854.	All this falls short of any express agreement that, as between UBS and Depfa, it would be Depfa who was taking the risk that the Front Swaps were invalid for any reason. The question, therefore, is whether this was necessarily implicit in these exchanges. In my judgment it was not. Under the Front Swaps, Depfa was on any view exposing itself to reputational damage if those swaps went wrong, as it would be Depfa who would then have to enforce them and against whom, at least in the first instance, any allegations of invalidity would be likely to be made, as has in fact happened. It was therefore necessary for Depfa to take such steps as it considered appropriate to make itself comfortable with that risk, regardless of the position between UBS and Depfa under the Back Swaps. Consequently the fact that Depfa took such steps, carrying out its own due diligence and obtaining an opinion from Freshfields, did not necessarily mean that in addition to taking reputational risk, it would also have a financial liability to UBS under the Back Swaps if the Front Swaps proved to be invalid. Mr Lancaster and Mr Sanz-Paris accepted that this was so when it was put to them in cross examination. I consider that they were right to do so.
855.	Moreover, Depfa expressly made clear its understanding that it was taking the credit risk of KWL but not other risks over which it had no control (see [495] and [196] above). UBS never responded that this was wrong because the agreement and understanding between the parties was that Depfa was taking the validity risk.
856.	Accordingly there was no common continuing intention or outward expression of accord that the validity risk of the Front Swaps would be borne by Depfa. UBS’s claim for rectification therefore fails.
857.	For the purpose of its case on estoppel, UBS relies not only on the matters indicated above, but also on the fact that Depfa made an initial payment of some US $32.6 million under the Back Swaps, even though it was by then on notice that KWL had commenced proceedings in Germany (see [524] and [525] above). However, even despite the (admittedly surprising) absence of any reservation or rights when Depfa made this payment, I do not regard that as sufficiently unequivocal to demonstrate the existence of a shared assumption that Depfa bore the risk of invalidity of the Front Swaps. In circumstances where Depfa accepts that it was taking the credit risk of KWL, the payment was consistent with Depfa’s understanding that it was obliged to pay even if KWL had defaulted.
Entire agreement
858.	If necessary LBBW and Depfa each relies on an entire agreement clause as a response to any case of estoppel which UBS is able to advance. This gave rise to considerable legal argument and citation of authority. As I have found that there is no valid case for estoppel, and as LBBW and Depfa accept that the entire agreement clause would not provide a response to a claim for rectification, I do not propose to deal with this point.
MISCELLANEOUS FURTHER CLAIMS
859.	I should briefly mention two miscellaneous claims not so far dealt with.
Depfa’s claim for recovery of the payment made to UBS
860.	First, there is Depfa’s claim for recovery of the US $32.6 million paid to UBS under the Back Swaps in March 2010 (see [525] above). This claim arises only (a) if the Back Swaps have not been validly rescinded (I have held that they have been and that in consequence Depfa is entitled on this separate ground to the return of this money: [787] above) and (b) the Front Swaps are unenforceable by Depfa (I have held that, subject to the undertaking to be given by Depfa, they would be enforceable: see [812] above). This claim arises, therefore, only if I am wrong on both of these issues. 
861.	In that event I would have held that Depfa is entitled to recover this money in restitution as having been paid under a mistake, namely that the Front Swaps were valid and enforceable and that as a result the money was due and payable to UBS. I accept the evidence of Ms Flannery of Depfa that she would not have permitted this payment to be made if she had believed that there was a risk that it was not payable to UBS. In those circumstances the position appears to be effectively the same as addressed by Tomlinson J in Haugesund Kommune v Depfa Bank Plc at first instance [2009] EWHC 2227 (Comm), [2010] Lloyd’s Rep PN 21 at [142] to [153].
Return of collateral
862.	It follows from my conclusions above that LBBW and Depfa are entitled to the return of collateral lodged by them with UBS.
THE PORTFOLIO MANAGEMENT CLAIM
863.	Each of the STCDOs had its own portfolio of Reference Entities, although there was considerable overlap between the entities included in each portfolio. Each portfolio was managed by UBS GAM pursuant to a Portfolio Management Agreement. The advantages of such a management agreement, whereby the portfolios would be continuously monitored and prompt action would be taken to minimise the risk of defaults, were emphasised by UBS during the parties' negotiations leading to the initial Balaba transaction, for example at the 9 May 2006 meeting (see [230] above).
864.	In fact, if the portfolios had not been managed at all, the outcome would have been much better. Although some of the entities originally included in the Balaba and LBBW STCDO portfolios defaulted, the defaults would not have reached the attachment points of the KWL tranches and there would therefore have been no loss at all to these portfolios. The Depfa STCDO portfolios would have suffered a loss of some US $92 million, although as a matter of fact that is only because of the presence in the initial portfolios of two entities which Mr Dattani was to remove. KWL’s case is that the management of the portfolios by UBS GAM was in breach of its obligations and that, as a result, it is entitled to recover by way of damages from UBS GAM any liability which it may have under the STCDOs either to UBS or to the intermediary banks. KWL pleaded a case that the initial composition of the portfolios was also negligent, but this case was abandoned shortly before the trial. Accordingly this aspect of the case is concerned with the management of the portfolios from the time when the STCDOs were concluded up until about the third quarter of 2008. By that time it is accepted by KWL that world economic conditions meant that it was too late to do much or anything to avoid losses. Once again, this claim will not arise on the findings which I have made, so I will state my reasoning and conclusions as briefly as I can.
865.	The portfolio manager responsible for the management of all four portfolios until he left UBS in September 2008 was Mr Sunil Dattani (see [88] above). Undoubtedly, what Mr Dattani did by way of management made KWL’s situation far worse than if he had left well alone, as he himself acknowledged: 
“Q (by Mr Salzedo). But do you accept, given the comparison between static and managed, that your management of these portfolios after they were selected has turned out to be disastrous for KWL?
A. In hindsight, yes. I fully appreciate that my management wasn't great.”
866.	The question, however, is whether, leaving hindsight aside, Mr Dattani’s management fell below the relevant standard to which he was required to adhere.
The standard required by the Portfolio Management Agreements
867.	The four Portfolio Management Agreements were in materially identical terms. The role of UBS GAM as manager was set out in clause 3.1(a):
“The Investor hereby appoints the Portfolio Manager to act as the agent of the Investor in connection with the Portfolio and the Portfolio Manager agrees to act as the agent of the Investor and, on behalf of the Investor, subject to and in accordance with the provisions of this Agreement: 
(i) to act as discretionary manager of the Portfolio and in connection therewith to make Adjustments and otherwise act as the Portfolio Manager judges appropriate in relation to the management of the Portfolio; and 
(ii) to do such other things in connection with the Portfolio required pursuant to this Agreement.”
868.	The standard of management required of UBS GAM was set out in clause 3.2:
“(a) Standard of Care 
Notwithstanding anything in this Agreement to the contrary, in performing its duties under this Agreement the Portfolio Manager shall exercise a standard of care in a manner consistent with practices and procedures 
(a) followed by prudent institutional portfolio managers of international standing managing investments similar in nature and character to those which comprise the Portfolio and 
(b) used by it to manage assets of the nature and character of the Portfolio for the customer, and, 
in any event, notwithstanding the foregoing and where not less than the foregoing, the Portfolio Manager shall follow its customary standards, policies and procedures in performing its duties hereunder. The Portfolio Manager covenants and agrees that it will perform its obligations hereunder with reasonable care and in good faith in accordance with the terms of this Agreement.”
869.	Thus UBS GAM’s contractual obligation included several strands. It had to exercise a standard of care consistent with the practices and policies of prudent institutional portfolio managers of international standing. It had to apply in the case of KWL the same standard of care as it applied to other customers. And it had to follow its own customary standards, policies and procedures. 
870.	It is important that these obligations were defined by reference to the nature and character of similar investments and of KWL’s particular portfolios. Unlike some other investors, KWL had only one interest so far as the management of the portfolios was concerned, and that was to avoid defaults reaching the attachment point of its tranches. It had received its premium upfront and, whatever happened, would not be entitled to any further return. It therefore had no interest in the portfolios being managed to produce an income. It was a long-term investor who would hold the portfolios for the duration of the STCDO (eight years in the case of Balaba and ten years in the other cases) and was therefore not interested in the portfolios being managed for short or medium term trading gains. Its only concern was to avoid defaults which would render it liable to UBS or the other banks on the credit protection which it had sold them. In these respects its interests were rather different from those of other types of investor in STCDOs such as banks trading for their own account (as UBS did during this period, with disastrous results) or hedge funds. What Mr Dattani had to do, therefore, was to focus exclusively on taking steps to minimise the risk of defaults in the portfolios.
871.	At some point before the Balaba transaction closed, probably on or about 7 June 2006, Mr Dattani had a meeting with Mr Heininger to introduce himself and to explain the management strategy which KWL could expect. There is no record of this meeting, but Mr Dattani accepted that he would have based his presentation on UBS GAM’s standard “pitch book” emphasising the bank’s global resources and expertise. Under the heading of “Investment Philosophy” the following bullet points were emphasised in the pitch book:
“Selection philosophy
•	UBS Global AM integrated research to identify credits 
-- UBS Global AM credit analysis integrated with UBS Global AM equity research 
•	Avoidance of companies with 
-- poor transparency or accounting 
-- rapidly changing fundamentals 
-- outlier spreads 
•	Exposure to low-risk HY [High Yield] companies rather than high-risk IG [Investment Grade] companies
•	Maximise diversification, minimise risk concentration: no big bets
Monitoring philosophy
•	Continuous surveillance to identify potential problem credits early (e.g. WorldCom, Enron, Parmalat, Delphi)
•	Early exit strategy for problem credits 
Execution philosophy 
•	Integration of UBS Global AM functions for execution decisions 
-- portfolio managers, research analysts, traders”
872.	Mr Dattani agreed that what was said here about maximising diversification, minimising risk concentration and avoiding big bets applied equally to ongoing management as it did to the initial selection of entities for the portfolio.
873.	The pitch book went on to give an example, the Italian company Parmalat, of how prompt action had been taken to remove a problem credit when spreads had started to widen, which had enabled the credit to be sold before disaster struck. It described the way in which UBS GAM would carry out ongoing monitoring of portfolio fundamental and market characteristics, together with “ongoing assessment of impact of different market scenarios on risk/reward profile of different tranches”. This last point was particularly relevant to KWL, whose concern was not with the portfolio as a whole or on the equity or senior tranches, but with the impact of whatever happened on its particular junior mezzanine tranches.
874.	Mr Dattani agreed that the approach described in the pitch book was the approach which KWL was entitled to expect from UBS GAM in managing the STCDO portfolios – that is to say, a conservative management approach, which maximised diversification, minimised risk concentration and did not involve the taking of any big bets. He agreed too that, as described there, KWL was also entitled to expect continuous surveillance to identify problem credits and an early exit strategy for problem credits which were identified. So too did Mr Dominic Powell, UBS GAM’s portfolio management expert. 
875.	In my judgment this was indeed the relevant standard required by clause 3.2(a) of the Portfolio Management Agreements. The pitch book reflects what needed to be done in the case of KWL’s portfolios, where the only objective was to minimise the risk of defaults, while the clause also requires the portfolio manager to follow UBS’s own customary standards, policies and procedures in performing its duties. Those standards were as set out in the pitch book. This is important. It means that UBS GAM's obligation was not merely to exercise reasonable care by the standards of a competent portfolio manager, an obligation which would leave some scope for different approaches and strategies to be followed, but to follow the particular conservative strategy described in the pitch book -- specifically, to maximise diversification, minimise risk concentration and avoid what would reasonably be regarded as “big bets” on any particular sector; and to ensure continuous monitoring of potential defaults in order to implement when necessary an early exit strategy. If Mr Dattani failed to follow the strategy described in the pitch book, UBS GAM would necessarily be in breach of its obligations.
Breach
876.	It is clear, however, that this was not the approach which Mr Dattani actually followed. 
A concentrated bet on financials
877.	Effectively Mr Dattani admitted as much:
“Q (by Mr Salzedo). You are aware, I think, that there have been expert reports about your management of these portfolios?
A.  I am.
Q.  I'm not going to take you through them, but I want to show you eight lines in one of the reports, if I may, which summarise things. Can I do that, please. It's the second report of Mr Hale at bundle {D2.1/5/205}. I just want to show you paragraph 28. Mr Hale says this:
‘The explanation for the substantially higher default rates in the UBS GAM portfolios compared to the investment grade universe is that the approach adopted by UBS GAM was not a diversification strategy. Essentially, UBS GAM took a concentrated bet on financials, bond insurers, risky consumer lenders, and banks that were known to have high -- and rising -- levels of leverage before the credit crisis struck. These sectors were all highly correlated with each other. By July 2008 exposure to these sectors had been ramped up to above 40 per cent in all three portfolios. The subsequent defaults as the crisis intensified came from within these sectors and the very high overlap between the portfolios meant that total loss was suffered (or virtually total loss priced in via unwind) across all four STCDOs.’
That's absolutely right, isn't it?
A. That's factually correct, yes.”
878.	It seems to me that by accepting that the summary given by Mr Mark Hale, KWL’s portfolio management expert, was factually correct, Mr Dattani was acknowledging (as he had to) that the approach described in the pitch book had not been followed. Far from maximising diversification and minimising concentration of risk, Mr Dattani’s approach had been to concentrate on highly correlated financial entities, bond insurers, risky consumer lenders, and banks that were known to have high and rising levels of leverage. Thus defaults in one of these areas were likely to trigger defaults in others also. 
879.	There was extensive debate between the experts, Mr Dominic Powell and Mr Mark Hale, both of whom I accept were seeking to assist me, as to whether the approach followed by Mr Dattani was a sensible one, or was in line with the approach followed by other portfolio managers at the time. For example, UBS GAM’s expert, Mr Powell, was able to make the point that many portfolio managers regarded financial entities as low risk and defensive investments compared to (for example) industrial stocks and that this remained the position well into 2008, albeit that some in the market had identified danger signals. He demonstrated also that many of the financial entities held by UBS GAM were also held in other CDO portfolios. Mr Hale too was prepared to say that, by reference to the strategies followed by portfolio managers in general, it was a reasonable strategy to remain concentrated in financial entities at least up to a certain point, after which it would be difficult to reduce that weighting because of the cost in subordination from trading out of financial entities with wide spreads, and that although there was an opportunity to do this in early 2008 after Bear Stearns was rescued by the US Government, some people would have taken the view that financials were still a safe investment.
880.	This was helpful in providing an understanding of the background, but ultimately in my judgment this debate was beside the point. Whatever may be said about the merits of a concentration in financial stocks as a portfolio management strategy in the 2006-8 period in the abstract, UBS GAM’s contractual obligation was to maximise diversification and avoid what the pitch book described as "big bets" on particular sectors. As noted at [88] above, on at least one occasion, in August 2007, he was reluctant to have a discussion with credit analysts about some of the financial entities in the KWL portfolios when one of his superiors, Mr van Klaveren, suggested that he should in view of the weighting of these entities in his portfolios. (It should nevertheless be made clear that as well as his concentration on financial entities generally, Mr Dattani included within the portfolios not only what might be regarded as mainstream defensive financial names, but also a number of higher risk financial entities, such as Kazakh and Icelandic banks which he himself described as "marginal names").
881.	Ultimately Mr Powell accepted that Mr Dattani’s strategy had been to concentrate risk rather than to maximise diversification and that although hindsight indicated that this strategy had proved to be wrong, it was not necessary to resort to hindsight to conclude that this was the strategy which Mr Dattani had adopted:
“MR SALZEDO: Do you recall, Mr Powell, that Mr Dattani's view was that in hindsight, he had made two mistakes. First, believing that financials, including US, Iceland and Kazakhstan would be bailed out by sovereigns, and second, believing that monolines would be bought out if they got into difficulties?
A. Yes.
Q. Do you recall that?
A. Yes.
…
Q. A portfolio manager meeting the relevant standard would try not to rest too much risk on too few of these kind of future judgments, wouldn't they?  Do you agree with that?
A. I think it depends on what probability they place on those judgements in terms of the risks that were occurring.
Q. Yes.  You obviously have to weigh up how extreme you think a risk is with how much money effectively you place on that risk not eventuating, don't you?
A. Yes.
Q. To the extent that you recognise risks as significant, you will minimise the amount that you focus on each of those risks if you can?
A. One would risk budget, yes.  You would look at the different risks, put probabilities associated with them and try and build a portfolio around that analysis.
Q. And that's especially important, isn't it, if your client has got a single tranche, a mezzanine single tranche, very important that you don't place too much on a few risks?
A. Depends -- to some extent, yes.  It depends on how extreme a probability you're putting on particular events occurring. Certainly at the time these portfolios were put together, there was no -- or very little -- very few people believed that we were going to have the level of financial crisis that we did, and the spreads of these names reflected there.
Q. But of course, the voices fearing that the kind of crisis that was coming, might be emerging, got louder throughout the period after these portfolios were put together, didn't they?
A. Yes.
Q. We certainly know in hindsight that Mr Dattani did stake too much on his opinion on those two matters turning out to be right, don't we?
A. Yes.
Q. And what I suggest to you is that although hindsight is relevant to whether they turned out to be wrong, actually even without hindsight, it is clear that Mr Dattani increased and maintained a position depending on a very few of these judgments for far too long as the crisis developed, didn't he?
A. Yes, that is correct. And one of the issues that I wrestled with is at what point should he have been making the move away from that.
Q. Yes.
A. And the nature of an STCDO and the nature of the hurdle MM is such that there comes a point in time where you are straitjacketed to the point that making certain moves becomes very difficult.”
Minimising risk or maintaining ratings?
882.	Further, Mr Dattani appeared in his evidence to struggle with the concept that KWL’s interest, and therefore his only priority, was to minimise the risk of defaults:
“Q (by Mr Salzedo). Do you accept that your primary and most important role as manager was to take all the steps you could to minimise the risk of default hitting KWL's tranches?
A. I think if that were the case, they would have gone for a static pool.
Q.  So you do not accept that that was your role?
A. I do not, because the rating was important.”
883.	The significance of the rating of a tranche was that it reflected the rating agency's assessment of the risk of default. Ultimately, however, it was the risk of default which mattered and not the rating. Mr Dattani’s answer was symptomatic of a focus on rating to the exclusion of all else, notwithstanding that the rating was merely one (even if a very important) measure of the risk. His view, however, was that “default risk is obviously absolute, but my prime function was to protect the rating”.
884.	He returned to this theme in response to some questions from me:
“MR JUSTICE MALES: Sorry, to interrupt, but can I just make sure I've understood how this transaction worked, because if I haven't, then you can correct me sooner rather than later.
As a result of these transactions being put in place, we know that KWL gets a premium, which I think is something you're not directly concerned with. But anyway, that's a sum of money that they get upfront right at the beginning, yes?
A. (Nods)
MR JUSTICE MALES: Now, they're never going to get anything more than that out of it, are they? Your portfolio management is not going to result in further payments to KWL because you do a particularly good job, is that right?
A. The way the PMAs were drafted, that would be the only money they get.
MR JUSTICE MALES: Exactly. So they get their premium up front, and that's all they're ever going to get?
A.  Correct.
MR JUSTICE MALES: And then the only downside they have from the transaction is if there are sufficient defaults that their attachment point is reached?
A.  That is correct. 
MR JUSTICE MALES: So the only thing that matters to KWL on the economics of this transaction, is if there are defaults, is that right?
A. It does, but you wouldn't get a tranche rated if you didn't want a PM [portfolio manager] to maintain the rating. There would be no point, because the Moody's and S&P restrictions that is put on to a PM are prohibitive, very prohibitive. They don't allow you to do certain things; you can do other things. But if KWL's intention upfront was to just get their money up front and have no -- nothing to pay for at the end, then they would have had an unrated tranche.
MR JUSTICE MALES: But the rating is only significant, isn't it, because it tells you that a default may be coming? If the rating is downgraded, that's a warning sign that there might be a default. It's not significant in itself, or for any other reason, is it?
A. It is in that, as I explained a few minutes ago, my Lord, if you take a static pool -- regardless of who selects it -- of credits, five years from now that static pool will worsen. So effectively, you hire a PM to make sure that the rating factor of the portfolio remains constant. There would be no other reason to have a PM.”
885.	It seems to me that this evidence demonstrates that Mr Dattani’s approach elevated form over substance and involved a potentially dangerous misunderstanding of what his real task was.
The Moody’s Metric
886.	It appears also that he misunderstood the contractual regime within which he was required to work. His evidence was that he was required when substituting Reference Entities into the portfolio to maintain or improve what was called the "Moody's Metric". The Moody’s Metric is an expression of an entity’s rating in numerical form, ranging from 1 for an Aaa-rated entity to 21 for a C-rated entity. The Portfolio Management Agreements contained a provision to the effect that, in short, if a certain Moody’s Metric (the “Hurdle MM”) for the portfolio as a whole was breached, then further substitutions were only permissible if they maintained or improved the Moody’s Metric of the portfolio or if KWL consented to the substitution. However, that provision did not apply unless and until the Hurdle MM was breached. It appears that Mr Dattani did not understand this. He described the Moody’s Metric as the “contractually agreed measure of risk" when it was no such thing, and appears to have believed that all his trades were required to improve the Moody’s Metric and, conversely, that any trade which did improve the Metric was desirable whether or not it increased the risk of defaults.
The relevance of spreads
887.	Mr Dattani’s focus on the rating tended not to give proper weight to the relevance of spreads as a measure of risk. Spreads were more volatile than ratings. If the creditworthiness of any particular name was deteriorating, that would be reflected by the market in an increased spread (although there could also be other reasons why spreads might widen, unrelated to possible default). It might also result in due course in a downgrading of the name's rating, but a downgrading by the rating agency would tend to lag the market by a period of time. Unless both factors were taken into account, the result could be misleading. What might appear to be an attractive spread for a given rating might in reality represent an increasing risk with which the rating agency had not yet caught up. It was therefore important not only to monitor the position of existing names in the portfolios whose spreads were widening in order to ascertain the reason for this occurring, but also to take care when adding a name to the portfolio that a high spread relative to the rating was not a signal of deteriorating credit quality.
888.	Some of Mr Dattani’s substitutions involved trades which improved the Moody’s Metric of the portfolio by substituting in entities whose market spread was widening, and substituting out assets with the same or a lower rating but with tighter spreads. This had the effect of improving the Moody’s Metric but increasing risk by reference to spreads, the measure which, particularly in the difficult market of 2007 – 2008, provided the most up-to-date information as to the risks of default. Mr Dattani accepted that he did not pay enough attention to attempting to catch names whose credit quality was falling:
“MR SALZEDO: You didn't really here, did you, pay enough attention to catching those falling names as they started falling?
A . Obviously history shows that you're right.”
Assessment of different market scenarios
889.	I was referred to nothing at all to suggest that Mr Dattani carried out any ongoing assessment of the impact of different market scenarios on the KWL tranches. Such an ongoing assessment was one of the features of UBS GAM management described in the pitch book, but it appears that at least so far as these STCDOs were concerned, it simply did not happen. If it had, Mr Dattani ought to have been alerted to the risks of the concentrated position in financials which he was running.
Quarterly reports
890.	Indeed Mr Dattani’s reporting generally was poor. There is no contemporaneous written analysis explaining the reasons for the various substitutions carried out or analysing their potential effects on the risk of loss to the KWL tranches. There is no evidence of any review of the existing contents of the portfolios or of any strategy as to whether and why any particular entity should be retained or substituted out. Mr Dattani did (with one exception) produce a “quarterly report” listing trades which he had carried out during the quarter and providing a “commentary”, but so far as relevant the commentary, which appeared virtually unchanged in every report from Q3 2006 to Q2 2008 was simply that “we remain cautious and hence overweight sectors which are heavily regulated for capital adequacy purposes”. This does at least demonstrate that Mr Dattani’s decision to maintain a high concentration of financial names was (at any rate until the summer of 2008) a deliberate choice.
891.	In fact Mr Dattani was criticised for his poor reporting by UBS GAM’s internal auditors in December 2006. They wrote:
“Minutes contain insufficient detail to evidence regular monitoring over credit risks and the rationale for CDS substitution decisions taken. Explicit approval by the CDO Investment Committee of the CDS portfolios for CDOs launched subsequent to Empyrean, and CDS substitutions on all portfolios, are not documented and do not provide evidence that sufficient review and analysis was performed to assess the quality of CDS names bought and sold.”
892.	Empyrean was the first CDO managed by Mr Dattani. The reference here to CDOs launched subsequent to Empyrean therefore includes – and primarily consists of – the KWL STCDOs. 
893.	The auditors warned that:
“In the event of litigation, there may be insufficient evidence to support investment substitution decisions and that regular monitoring over credit risks was being performed.”
894.	Exactly so.
895.	The auditors recommended that:
“Minutes should evidence the review of available research reports, as well as document the investment rationale and approval of new investments or substitutions. Ongoing monitoring should be demonstrable. The Portfolio Manager should consider taking notes to evidence his review of the daily reports produced by the Portfolio Management Tool or alternatively sign off these reports and keep them in a file.”
896.	Mr Dattani did not follow this recommendation. In these circumstances I see no reason to give him the benefit of the doubt by accepting that, despite the complete absence of contemporaneous records, proper monitoring of credit risks was nevertheless taking place. I conclude that it was not. It would in any case have been very difficult for Mr Dattani to carry out a proper analysis in his head. Rather it appears that such analysis as Mr Dattani carried out consisted of little more than looking at credit analysts’ reports. But the credit analysts were focused on individual names. What was needed was proper analysis of the impact of potential scenarios on the KWL tranches, as described in the pitch book.
897.	As mentioned above, there was one quarter (Q4 2007) when no report at all was provided. It became clear at the trial that the reason for this was to cover up a costly error made by one of Mr Dattani’s staff. What happened was that a trade on 18 October 2007 resulted in the Depfa STCDO portfolio breaching the Hurdle Moody’s Metric due to an error by a subordinate who rated one trade but executed a different one by mistake. Mr Dattani then carried out trades which had the effect of restoring the Moody’s Metric to its level before the mistake occurred. However, in what appears to have been a deliberate decision, no mention was made of any of this to KWL at the time and no quarterly portfolio management report was produced for this period. Nevertheless KWL was left to bear the transaction costs (in the form of reduced subordination) of the trades which had to be carried out as a result of UBS GAM’s own error. Apparently Mr Dattani saw nothing wrong with this, although Mr Richard Slade QC for UBS GAM rightly accepted in closing that this should not have happened. As Mr Dattani rather surprisingly put it:
“Any portfolio manager that makes a mistake in a client account, the client inevitably ends up paying for it.”
898.	More importantly, the trades carried out in this period were harmful to KWL. They included the acquisition of Aiful and Takefuji, two Japanese entities which went on to default, an increase of exposure to Lehman Brothers which went on to default, and the acquisition of two further risky exposures (Cemex and Washington Mutual) which went on to default but which UBS GAM managed to remove from the portfolio (albeit at a cost to KWL) before they did so. It is, I suppose, possible that Mr Dattani would have added these entities to the portfolios at some point in any event, but the fact is that both were added in consequence of the October 2007 error.
899.	Mistakes happen. But I accept KWL’s submission that UBS GAM’s concealment of this error and failure to explain to KWL how the error had affected it (in terms of transaction costs and the entities which the portfolio manager had been obliged to bring into the portfolio in order to correct the erroneous trade at a time of sharply increasing market stress) is a remarkable individual example of mismanagement for which there is no innocent explanation. 
No early exit strategy 
900.	Nor did Mr Dattani follow, at least according to his evidence, the early exit strategy promised by the pitch book. In an extended passage of his evidence he appeared to be saying that he would only consider removing a name when he became convinced that it was likely to default:
“Q (by Mr Salzedo). Going back to the Kazakh banks, a point you don't mention in the witness statement is that on 1st November 2007, Moody's downgraded the Kazakh banks; are you aware of that?
A. Yes.
Q. You are?
A. Yes.
Q. That was only a belated recognition, wasn't it, of what the market spreads had been saying to anybody who listened to them?
A. Yes.
Q. And a prudent portfolio manager, pursuing the strategy I've already referred to, would certainly have eliminated, or at the very least reduced these banks from his portfolios after the downgrade, if they hadn't done so before?
A. A prudent portfolio manager would trust his gut instinct, which is: is he convinced these names are going to default? And I was not convinced these names were going to default.
Q. I see that, Mr Dattani. That's quite an important aspect, I think, isn't it, of your approach to this? Your view was that it was for you as the manager to form a gut instinct, and if you were convinced that a name was going to default, obviously you would have to remove it. But if you were not convinced it was going to default, your view was you should carry on with the optimisation, the ongoing optimisation process that we discussed yesterday?
A. I think sometimes when you know that a name is going to default, you still might choose not to remove it, because the cost of actually removing it is tantamount to actually having a default and recovery.
Q. Okay, I understand. But certainly you wouldn't remove it at anything short of being convinced of a default, and you might not even then?
A. No, I think, at the end of the day, you would kind of like see -- okay, if a name was trading at 100 and you think it was going to default, the cost of removing it is low. If the name is trading at 1,000, the cost is pretty high. So you would have to look at what the cost benefit is for the client. If I thought the name was going to default, which I didn't in these cases.
Q. So the threshold for you to consider removing a name, apart from in a metric improving trade, is that you are convinced that it's going to default, then you would consider whether to remove it?
A. Yes, once it migrates into non-investment grade, you've actually -- you've already -- you're in a straight jacket, because it's already high yield.
Q. Yeah. It's that danger, isn't it, that is why the pitch book tells clients that you'll have an early exit strategy like the one that was apparently followed for Parmalat many years ago? That's why the early exit strategy is sold to clients as what you're going to do, isn't it?
A. I think in CDOs, the early exit strategy is what cash portfolio managers do. In CDOs, you are actually a little bit constrained, because you have too many moving parts. You can't hold cash, for example, you can only own an asset. And you're always fully invested. A cash portfolio, they do not have these constraints.
Q. I see. So your view is that you couldn't really follow the policy which had been set out – 
A. No, that's not my view, sir. My view, my Lord, is very simple.  There comes a point in time if you haven't replaced a name, which is, shall we say, risky, it is possibly too late. So if something is going to migrate from investment grade to high yield, and you haven't picked it up at investment grade, by the time it migrates to high yield, it is too late, because it has already widened. So there you make a slightly different -- I wouldn't call it a "bet", but a choice: is the name a default risk?  If it is, then obviously you need to still think about removing it, and if you come to the conclusion that it is default risk, you need to look at where it's trading. And if it's trading very wide, you need to look at what the recovery would be. So there are a series of decisions which are needed to be made in a CDO portfolio which are not required for a cash portfolio.
MR JUSTICE MALES: But isn't the approach that you describe, which is that you, as a prudent manager, if it's still investment grade, you don't need to remove it, and you only start to think about that when you form the view that it's likely to default; if you have formed that view, then isn't it likely that others in the market will have done so as well, and that the spread will have widened, and your approach means that it will, if not always, then very often be too late to remove it, because it will be too expensive to do so?
A. I -- I mean, hypothetically the example you gave, the only thing I would change is you need to -- if you catch a falling name -- and I mean falling in rating -- at the investment grade level, it's obviously not going to cost you very much. But if it migrates to a high yield and then into default, you are -- in a CDO portfolio like this, you are almost certainly likely to just hold it and take the default. CDO portfolios effectively have higher defaults, purely because there are certain trades you cannot do that you would do in a cash portfolio.
MR SALZEDO: You didn't really here, did you, pay enough attention to catching those falling names as they started falling?
A. Obviously history shows that you're right.”
901.	Later, while being asked about the Icelandic banks in his portfolio, Mr Dattani confirmed that his approach was only to consider removing a name when he became concerned about the possibility of a default:
“MR JUSTICE MALES: You say in [paragraph] 163 [of his witness statement]: ‘I was not concerned about the Icelandic banks defaulting.’ Does the fact that you started looking at exiting indicate that in fact you did have some concern?
A. Okay, both those things can actually be true, my Lord, because I don't know at what time I looked at the Icelandic exits. It could have been May [2008], and I'm talking about January here.
MR JUSTICE MALES: Right, but consistent with the approach you described earlier, you would only look at exiting once you became concerned about the possibility of a default; is that a correct understanding?
A.	That would be correct, yes.”
902.	Whatever else this was, it was not an early exit strategy. As described by Mr Dattani it was a late exit strategy which, because of the high cost in terms of lost subordination of removing a name with a wide spread, was calculated either to lead to defaults (if the name was not removed) or to increase the vulnerability of the portfolios by reducing the number of defaults required to reach their attachment point (if it was removed, but only at the cost of a loss of subordination).
903.	Faced with this evidence, Mr Slade for UBS GAM submitted in closing that (in effect) Mr Dattani cannot actually have meant what he said in the passages quoted above because on a number of occasions he did in fact remove "credit impaired names" from the KWL portfolios. “Credit Impaired” is a defined term in the Portfolio Management Agreements referring to an entity in respect of which “in the judgement of the Portfolio Manager (acting in a commercially reasonable manner) there is a significant risk that the relevant obligations of the Reference Entity will materially decline in credit quality (which risk is unrelated to general market conditions) or default during the remaining life of the Portfolio Swap”. The significance of the definition is that there is no limit to the number of "Credit Impaired" names (as distinct from other names) which the manager is permitted to trade out of the portfolios. 
904.	UBS GAM produced a table showing that a large number of such names were removed, almost 80% of which while they remained investment grade. However, I regard this as being of very little weight. This was not a point explored in the evidence, either of Mr Dattani or of the experts, and the point made by reference to the table appears directly to contradict the evidence which Mr Dattani not only gave, but confirmed when I checked that I had understood him correctly, as set out above. Since the contractual definition of "Credit Impaired" expressly requires an exercise of judgment by the portfolio manager, some evidence would be required of the nature of the judgments which Mr Dattani made. But there is none. They may have been removed for entirely different reasons. Or they may in some cases have been removed consistently with the strategy which Mr Dattani described.  I am prepared to assume that the names referred to in the UBS GAM table could reasonably have been regarded as credit impaired and were in fact removed from the portfolios. There is support for this in some of the portfolio reports, although these do not show at what stage in their decline the entities in question were removed and this was not addressed in the evidence. However, it does not follow that Mr Dattani was following a strategy of removing names where he foresaw a risk of a future decline. If he was, the evidence which he gave set out above would be very strange. Nor does the fact that some names were removed counter the evidence that his strategy was to concentrate on, not to diversify away from, financial entities.
905.	There was a difference of view between the experts as to when Mr Dattani should prudently have sought to reduce the portfolios’ overweight position in financials. Mr Hale’s view was that he should have done so from about July 2007, when the credit crunch was having an impact. Mr Powell favoured a later date. But it is not apparent that Mr Dattani ever considered this properly. His quarterly reports continued up to and including the collapse of Lehman Brothers in September 2008 to recite the mantra that “we remain cautious and hence overweight sectors which are heavily regulated for capital adequacy purposes”, although reports from about April 2008 added the qualification that while trading out of exposures to financial entities would increase diversity, “spreads in non-financial names do not permit this at this point in time”. This too is inconsistent with any suggestion of an early exit strategy.
Conclusion on breach
906.	I conclude that in the respects discussed above the management of the KWL portfolios by Mr Dattani failed to meet the relevant standard required and accordingly that UBS GAM was in breach of the Portfolio Management Agreements. Although UBS GAM submits that its management was constrained by the initial composition of the portfolios which had been constructed so as to generate a high upfront premium for KWL, I do not accept that this provides an answer to KWL’s essential complaint that the management approach adopted by Mr Dattani was not as set out in the pitch book, but involved an undue and unnecessary concentration of risk which was not properly monitored as the situation developed. Certainly it was not Mr Dattani’s evidence that he was unable to provide the service to which KWL was entitled. It was Mr Hale’s evidence, which I accept, that there was nothing out of the ordinary about the ratings required by KWL and the spreads on the names included within the initial portfolios in order to generate the premium for KWL which would have rendered management in accordance with the pitch book unduly difficult.
907.	I would add that KWL relies on a number of scathing comments about Mr Dattani’s management abilities made at the time, not only by colleagues within UBS and UBS GAM, but by others who were asked to look at the composition of the portfolios at about or after the time he left UBS GAM. Taken at face value some of these were damning comments, but I have not founded my decision on them. I accept UBS GAM’s submission that Mr Dattani’s own evidence and the evidence of the experts is a safer guide to the question whether his management of the portfolios met the relevant standard.
Causation and assessment of loss
908.	The defaults in the STCDO portfolios all occurred in respect of financial entities that were negatively affected by the global liquidity crisis and subsequent broader financial crisis in 2007-2009. There is accordingly no real doubt that Mr Dattani’s “concentrated bet” on high-risk financial entities, which constituted a breach by UBS GAM of its obligations under the Portfolio Management Agreements, caused loss to KWL. 
909.	A precise assessment of the quantum of that loss is not merely more complex if it is necessary to reconstruct the trades which Mr Dattani would have carried out if he had been exercising the required standard of care (as UBS GAM submits), but impossible. To illustrate this simply, I consider that Mr Dattani’s inclusion of three Kazakh banks in the Balaba portfolio represented an undue concentration of somewhat exotic risk. However, a prudent manager might well have taken the view that to include one such bank would be acceptable. How is the court to say whether the bank which would properly have been included was the one which went on to default (JSC BTA)? There is currently no evidence which would enable such a decision to be made and, even if the experts were sent away to think about this question, it is unlikely that they could provide a sensible evidence-based view. That difficulty, however, would be multiplied many times over in any attempt to reconstruct a notional carefully managed portfolio. It would be necessary not only to unwind the trades actually carried out by Mr Dattani whereby names which went on to default were added to the portfolios when they should not have been, but also to postulate notional trades which Mr Dattani would or should have carried out instead, for example to remove names which he was anxious to remove. It would be necessary also to take account of the impact of any such trades on the portfolios’ subordination. This would be an impossible exercise. In my judgment the law does not require that it be undertaken.
910.	I accept KWL’s submission that a much simpler approach is appropriate. That is to say that any competent manager should (and on the balance of probabilities would) have done at least as well as if there had been no management at all. Having trumpeted the advantages of portfolio management as a means of minimising the risk, and taken the fees payable for managing the portfolios, UBS can hardly suggest otherwise. The Balaba and LBBW STCDO portfolios would have suffered no loss at all if they had not been managed. In the case of the Depfa portfolios, with no management there would have been a loss of some US $92 million but only as a result of the presence in the original portfolios of two entities which Mr Dattani removed. However, I accept KWL’s submission that if Mr Dattani removed them, the probability is that any competent manager exercising an appropriate standard of care would also have done so. Necessarily this represents something of a broad brush approach, but in my judgment it is realistic and does not involve the making of unduly generous assumptions in favour of KWL (cf. the reservations expressed by Hamblen J in Porton Capital Technology Funds v 3M UK Holdings Ltd [2011] EWHC 2895 (Comm) at [237] to [245] concerning earlier cases in which a "generous" approach had been applied).
Conclusion
911.	I conclude, therefore, that on all of the portfolios, the losses in fact suffered were caused by UBS GAM’s breaches of the Portfolio Management Agreements. If necessary, I would have held that KWL is entitled to recover from UBS GAM in respect of any liability which it was under to UBS or the intermediary banks.
OVERALL CONCLUSION
912.	I state now my overall conclusions in this case. I begin with my conclusions on the issues which have proved to be decisive of the outcome and follow these with the conclusions which I would have reached if necessary but which, in the event, do not arise.
The Balaba STCDO
913.	UBS is not entitled to enforce the Balaba STCDO. Although KWL had capacity to enter into this STCDO because UBS was not grossly negligent in failing to appreciate the need for prior Supervisory Board approval under KWL’s Articles, KWL was entitled to rescind and has validly rescinded the STCDO on either of two grounds. The first is that although Value Partners was generally the agent of KWL, as a result of the arrangement reached between Mr Bracy of UBS and Value Partners whereby Value Partners would deliver clients to UBS, there was also an agency relationship between UBS and Value Partners. The bribe which Value Partners paid to KWL’s managing director Mr Heininger was paid within the scope of that agency relationship so as to make UBS responsible for it in law. The second ground is that to the knowledge of UBS, Value Partners was subject to a conflict of interest as a result of its dealings with Mr Bracy to which KWL did not give its informed consent. However, KWL’s further claim to be entitled to rescind the Balaba STCDO for fraudulent misrepresentation by UBS fails. UBS did not make the representations which KWL alleges.
UBS’s damages claims
914.	UBS’s claim for damages consisting of the losses suffered on its hedging contracts is dismissed. Although the ancillary documents on which UBS relies contain false statements made by Mr Heininger, these were not the cause of UBS's losses. Those losses were caused by the fact that the STCDO transactions are unenforceable and have been rescinded as a result of conduct for which UBS is responsible in law. 
Consequences of rescission as between UBS and KWL
915.	As a result of the rescission of the transactions:
a.	KWL must repay to UBS the net premium of US $28.1 million plus €6.4 million less the aggregate of (i) the bribe paid to Mr Heinginger and (ii) the sums received by KWL which were used to purchase additional subordination.
b.	KWL must also repay to UBS the £3.3 million paid by UBS to unwind the Balaba CDS.
c.	KWL’s claim for payment of the Early Termination Amount of US $66,916,676 under the GECC, MBIA and Merrill Lynch single name CDSs is dismissed. 
The Back Swaps
916.	UBS is not entitled to enforce the LBBW and Depfa Back Swaps. LBBW and Depfa are each entitled to rescind and (on the assumption that the undertakings referred to below will be given) have validly rescinded their respective Back Swaps on the ground of fraudulent misrepresentation by UBS. The representations in question were that UBS believed Value Partners and Mr Heininger to be honest and that it did not know that the transaction which it was presenting to the intermediary banks was tainted by bribery and/or by Value Partners' conflict of interest. In each case Mr Bracy, whose knowledge and intention for this purpose are to be attributed to UBS, knew that Messrs Senf and Blatz were dishonest and that the proposed transaction was tainted by Value Partners' conflict of interest as a result of the arrangement which he had reached with them.
917.	As a result of the rescission of the Back Swaps:
a.	LBBW must return its intermediation fee of €2 million to UBS.
b.	Depfa is entitled to the return of the US $32,606,699.31 paid to UBS in March 2010 less its intermediation fee of €1.3 million.
c.	LBBW and Depfa must undertake not to enforce their respective Front Swaps against KWL.
d.	LBBW and Depfa are each entitled to the return of the collateral lodged by them with UBS.
Contingent conclusions
918.	If necessary I would also have held as follows:
a.	KWL had capacity to enter into the Depfa Front Swaps, which are valid and enforceable by Depfa against KWL.
b.	KWL would be entitled to damages or an indemnity from UBS in the event that it is required to pay LBBW or Depfa the amounts due under the LBBW or Depfa Front Swaps.
c.	As a matter of construction of the Back Swaps, the liability of the intermediary banks to UBS is dependent on KWL being liable to the intermediary banks, but does not depend on payment being made by KWL. That is so regardless of whether the Front Swaps have been subject to Early Termination.
d.	UBS's claims for rectification of the Back Swaps would have failed; further, there is no estoppel which would have prevented the intermediary banks from relying on the true construction of the Back Swaps. 
e.	UBS GAM’s management of the portfolios failed to meet the required standard, with the consequence that KWL would have been entitled to recover damages from UBS GAM to indemnify it against any liability to UBS or the intermediary banks under the STCDOs.
Concluding observations
919.	As I observed at the outset, neither UBS nor KWL emerges with credit from this saga. For UBS it has been a case study in how not to conduct investment banking in an honest and fair way. It is to be hoped that the events described belong to a bygone era. As most of the main participants have moved on, and many of them are no longer employed in the banking industry, there is room to believe that to be so.
920.	For KWL too, it is to be hoped that these events are firmly in the past. It is apparent, however, that for many years KWL was run by a criminal who was able to plunder the company for his personal gain and (at least in some respects) to enlist the support of his fellow managing director in covering his tracks. He was able too to hoodwink the Supervisory Board whose task it was to provide oversight of his activity, but who displayed remarkable complacency when the warning signs were there to be seen.
921.	Mr Heininger’s greed and dishonesty could easily have been catastrophic for KWL. They would have been if it had not been for the fact that the dishonest advisers with whom he was in bed overreached themselves by entering into a corrupt arrangement with a maverick banker at UBS who was allowed far too much autonomy, with a view to ripping off not only KWL but their other clients as well.
922.	Two final observations. First I express my thanks to all counsel and solicitors engaged in this case for the quality of their submissions and the co-operation which ensured the efficient process of the trial. Second I note that the outcome here and in Germany may be said to illustrate that the money and effort expended on jurisdictional disputes are sometimes misdirected. KWL fought hard to resist the jurisdiction of the English court and to have all these issues decided in Germany. There is therefore some irony in the fact that, as events have turned out and although there are good reasons why this is so, it lost the case in Germany against LBBW and has substantially, although not entirely, succeeded here. Litigation is not like football. It is not always an advantage to play at home.