UBS AG sued Highland Capital Management LP for $686 million, saying the hedge fund manager provided false financial information to avoid making payments on a transaction.

The complaint, filed June 28 in New York State Supreme Court, asserts that Highland Capital and two of its affiliate companies fraudulently persuaded UBS to restructure debt linked to a planned deal known as a collateralized debt obligation, or CDO, in 2008.

Restructuring allowed Highland to avoid an $86 million payment. But as the CDO deal deteriorated, UBS suffered hundreds of millions of additional losses.

UBS' complaint says Highland provided false, incomplete and otherwise misleading information about the financial health of its affiliate companies.

A Highland Capital spokesman was not immediately available for comment. A UBS spokesman declined to comment.

UBS said in its complaint that it agreed to finance a CDO offering sponsored by Highland Capital in spring 2007.

By August 2007, the deal had not occurred and was terminated. Highland then owed UBS $86 million, the complaint says, to cover a decline in the value of assets temporarily financed by UBS, or warehoused, for the deal.

Instead, UBS agreed to a restructured transaction after negotiations, providing Highland Capital and its affiliates an amended warehouse facility, for which losses eventually ballooned to $686 million when the affiliates defaulted on November 11, 2008.

The case is UBS Securities LLC and UBS AG London Branch v. Highland Capital Management LP, Supreme Court of the State of New York, County of New York.

(Reporting by Joe Rauch; Editing by Steve Orlofsky)