Providing some respite for the beleaguered Swiss banking giant, a New York Supreme Court judge has dismissed a lawsuit alleging that UBS was responsible for regulatory failings on the part of a now-defunct hedge fund for which it acted as prime broker and custodian.

The plaintiffs, who had invested a total of USD79m in Wood River Partners, claimed that UBS was aware that the fund had accumulated a large shareholding in a loss-making company, Endwave, but had failed to report its stake as required to the Securities and Exchange Commission.

Far from disclosing the stake itself, or withdrawing as prime broker, the investors alleged, UBS manipulated the market in Endwave stock to suit its own ends. They claimed the bank borrowed from the Wood Rivers Partners account to sell Endwave shares short and helped other UBS clients do the same, resulting in a decline in the value of the fund's portfolio.

However, UBS said it was not directly accountable to the plaintiffs and moved to dismiss the complaint, which was filed in May 2007. The bank was supported by the judge, which ruled that it did not owe a duty of care to the fund's investors.

'Plaintiffs merely assert that, by virtue of UBS's position as prime broker, clearing broker and custodian for the fund, UBS assumed a fiduciary duty to the plaintiffs, as limited partners,' the judge ruled. 'These allegations, without more, are not sufficient to establish the existence of a fiduciary relationship.'

This ruling sets down a precedent for any future litigation by investors alleging negligence o malfeasance against fund service providers, especially prime brokers. It might also explain why investors in the defunct Bayou Management hedge funds, who have filed a lawsuit against prime broker Goldman Sachs, are seeking a mere USD20m from the world's largest investment bank.

Hedge fund service providers do not automatically have a fiduciary responsibility to their clients' investors - a judgment that undoubtedly will have many prime brokers sighing with relief.