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Credit Suisse Hit with Two Class Action Lawsuits

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  • Posted on: Mar 9 2018

Recently, Credit Suisse (the “Bank”), the multinational financial services holding company based in Switzerland, was hit with two class action lawsuits, one from investors over the Bank’s writedown of more than $1 billion and the other from U.S.-based brokers who refused or were unable to move to Wells Fargo & Co. (“Wells Fargo”) after their private banking unit was closed in 2015.  Both lawsuits come at a time when the Bank has been in the news for legal challenges and inquiries linked to it or former employees.

Credit Suisse Writedowns

The investor class action lawsuit was brought by the City of Birmingham Firemen’s and Policemen’s Supplemental Pension System (“Birmingham”) on behalf of all persons or entities that purchased or otherwise acquired Credit Suisse’s American Depositary Receipts (“ADRs”) on the New York Stock Exchange (“NYSE”) between March 20, 2015, and February 3, 2016 (the “Class Period”). Birmingham seeks relief under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et. seq.

The Complaint alleges that, throughout the Class Period, Credit Suisse and certain of its officers (“Defendants”) made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and risk controls.  In particular, Birmingham maintains that Defendants made false and/or misleading statements and/or failed to disclose that: (1) Credit Suisse’s risk protocols and control systems were routinely disregarded; (2) the Company was accumulating billions of dollars of risky, highly illiquid securities in violation of those risk protocols; and (3) as a result of the foregoing, Defendants’ statements about Credit Suisse’s business, operations, and risk controls were false and misleading and/or lacked a reasonable basis.

According to Birmingham, throughout the Class Period, Defendants represented in SEC filings that Credit Suisse maintained “comprehensive risk management processes and sophisticated control systems” – a notable component of such systems was the Bank’s high-level Capital Allocation and Risk Management Committee (“CARMC”) – which established and allocated appropriate trading and risk limits for the Bank’s various businesses.  Birmingham alleges that Credit Suisse’s trading and risk limits routinely increased to allow the Bank to accumulate billions of dollars in extremely risky, highly illiquid investments. According to the complaint, the Bank “surreptitiously accumulate[d] nearly $3 billion in distressed debt and U.S. collateralized loan obligations (“CLOs”), which were … difficult to liquidate and required significant capital investments.”  This investment position, says Birmingham, was undisclosed, “violated Credit Suisse’s represented risk protocols and rendered the Bank highly susceptible to losses when credit markets contracted.”

On February 4, 2016, Credit Suisse announced its fourth quarter and year-end financial results, which included a $633 million writedown from the sale of the Bank’s illiquid distressed debt and CLO positions. That amount, says Birmingham, “swell[ed] to nearly $1 billion in the ensuing weeks.” The complaint notes that Defendant Tidjane Thiam, Credit Suisse’s recently-appointed CEO, “admitted that these risky and outsized investments were only allowed because trading limits were continuously raised, which enabled traders to take larger positions in violation of the Bank’s [represented] risk policies.

The complaint notes that market analysts and former Credit Suisse insiders were “incredulous that the position went unreported,” and doubted that the bank’s senior executives did not know about the illiquid positions sooner. Some said it was “inconceivable” that the CARMC was unaware of the holdings.

Birmingham alleges that as a result of the announcement, the price of the Bank’s ADRs declined from a close of $16.69 on February 3, 2016, to a close of $14.89 on February 4, 2016—an 11% drop that “wiped out” approximately $230 million in market capitalization.

Credit Suisse said in a recent statement that “the claim is unfounded and without merit.”

“In the last three years, Credit Suisse has analyzed these allegations and responded to information requests from supervisory bodies.  All regulatory reviews were closed without any action against Credit Suisse,” the Bank said.

The shareholder class action is not the only legal challenge facing the Bank. As noted, former U.S.-based brokers have accused the Bank of withholding up to $300 million of deferred compensation after their private banking unit was shuttered in 2015.

The Broker Class Action

In a class action complaint filed last month in the United States District Court for the Northern District of California, Christopher Laver (“Laver”), a former Credit Suisse Securities broker of 13 years who joined UBS Financial Services in 2015, alleges that the Bank intentionally entered into a recruiting transaction with Wells Fargo rather than a sale to avoid triggering a change-of-control provision in brokers’ employment agreements that would have accelerated deferred compensation payments. Brokers who joined Wells Fargo collected their deferred shares. Wells Fargo is not a named defendant and was not accused of wrongdoing.

Laver also alleges that many brokers turned down offers from Wells Fargo out of concern over its ability to serve their customers.  In that regard, Laver maintains that Credit Suisse knew many brokers would not join Wells Fargo because its business and client base was different but entered the recruiting deal because a sale of the unit would have constituted a “change of control” requiring the payments.

“Wells Fargo was incapable of and/or ill-suited to handle certain significant portions of Credit Suisse advisers’ business, and Wells Fargo maintained a different type of client base than Credit Suisse advisers,” the complaint says. “At the time it entered into the ‘recruiting agreement’ with Wells Fargo, Credit Suisse knew and expected that many of the Credit Suisse financial advisers would not and/or could not work for Wells Fargo.”

The class-action lawsuit supplements dozens of arbitration proceedings that former Credit Suisse brokers commenced to collect back pay and to avoid repaying balances on promissory notes that the Bank is demanding.

Credit Suisse has maintained that it can keep the deferred compensation, which the complaint says may be as much as $300 million because the brokers “resigned” rather than joined Wells Fargo.

“Credit Suisse should not be able to avoid its obligation to compensate the advisers fully and fairly by claiming they ‘resigned’ when, in fact, Credit Suisse simply ceased operating this business,” the complaint says.

Karina Byrne, a Credit Suisse spokeswoman, said that if the brokers had accepted Wells Fargo’s offers they would have received all their deferred compensation. She also disputed the allegation that a change of control would have triggered accelerated awards of the deferred shares.

“Those who chose not to accept those offers had negotiated equally or more lucrative compensation packages from competing institutions that also covered the same contingent deferred compensation at issue here, consistent with standard industry practice,” she wrote in an e-mail. “Simply put, the plaintiff here is looking to be paid the same money twice.”

The class-action lawsuit was filed on behalf of brokers with unvested compensation awards who were effectively “terminated” between October 20, 2015, and March 31, 2016, because their “private bank” went out of business. Laver seeks unspecified damages for roughly 200 brokers.

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