On December 16, 2020, Judge Lorna G. Schofield of the U.S. District Court, Southern District of New York, granted final approval of a $15.5 million settlement in a federal securities class action against Credit Suisse Group AG, regarding its misrepresentations of its trading limits and risk controls and resulting in accumulation of billions of dollars in extremely risky, highly illiquid investments, including the surreptitious accumulation of nearly $3 billion in distressed debt and U.S. collateralized loan obligations (“CLOs”).
On March 19, 2018, Cohen Milstein and Saxena White P.A. were appointed Co-Lead Counsel, and Cohen Milstein’s client, International Brotherhood of Teamsters Local No. 710 Pension Plan, is a Co-Lead Plaintiff.
The putative federal securities class action was filed by Cohen Milstein’s Co-Lead Counsel on behalf of the City of Birmingham Firemen’s and Policemen’s Supplemental Pension System, International Brotherhood of Teamsters Local No. 710 Pension Plan and other persons or entities that purchased or otherwise acquired Credit Suisse Group AG American Depository Receipts (ADRs) on the New York Stock Exchange (NYSE) between March 20, 2015 and February 3, 2016, inclusive (the “Class Period”), seeking to pursue remedies under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et. seq.
The complaint alleges that throughout the Class Period, Defendants repeatedly touted in SEC filings that Credit Suisse maintained “comprehensive risk management processes and sophisticated control systems” governing its investment operations. A notable component of the Bank’s risk management structure was its high-level Capital Allocation and Risk Management Committee (“CARMC”), which was responsible for, among other obligations, establishing and allocating appropriate trading and risk limits for the Bank’s various businesses. Significantly, Credit Suisse represented in its Class Period filings that the trading and risk limits set by the CARMC were “binding” on the Bank’s businesses and trading desks. In addition, only senior management had the authority to temporarily increase a divisional risk committee limit and, even in those cases, such authority was limited to an “approved percentage for a period not to exceed 90 days.”
Contrary to Defendants’ representations, however, Credit Suisse’s trading and risk limits were not actually binding, and were routinely increased to allow the Bank to accumulate billions of dollars in extremely risky, highly illiquid investments. Indeed, Defendants’ scheme enabled the Bank to surreptitiously accumulate nearly $3 billion in distressed debt and U.S. collateralized loan obligations (“CLOs”), which were notoriously difficult to liquidate and required significant capital investments. This outsized investment position—which was undisclosed to shareholders—violated Credit Suisse’s purported risk protocols and rendered the Bank highly susceptible to losses when credit markets contracted.
By the beginning of 2016, with credit markets tightening, Defendants could no longer hide the truth. On February 4, 2016, Credit Suisse announced its Fourth Quarter and Full Year 2015 financial results, which included a massive $633 million write-down from the sale of the Bank’s outsized, illiquid distressed debt and CLO positions—an incredible loss that would swell to nearly $1 billion in the ensuing weeks. Even worse, Defendant Tidjane Thiam, Credit Suisse’s recently-appointed CEO, explicitly admitted that these risky and outsized investments were only allowed because trading limits were continuously raised, which enabled traders take larger and larger positions in violation of the Bank’s publicly-touted risk policies. In addition, Thiam acknowledged that Credit Suisse’s investment bank had acquired these securities over the years as it was “trying to generate revenue at all costs.”
The market reacted in astonishment. Analysts and former Credit Suisse insiders were incredulous that the position went unreported, responding with disbelief at the notion that Credit Suisse’s senior executives did not know about the outsized illiquid positions sooner. Credit Suisse bankers said it was “inconceivable” that the CARMC was unaware of the holdings. A former Credit Suisse subsidiary board member remarked: “If the CFO didn’t know about it, then sure as hell the chief risk officer would have, which means everybody would have . . . It’s hard to imagine that nobody knew about this stuff.” In assigning an uncertainty rating to Credit Suisse’s securities, a Morningstar report notably explained: “We’re more worried by Thiam’s admission that the bank held large illiquid position that he and other top managers did not know about in October.”
In the wake of Credit Suisse’s revelations, 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.
On February 19, 2019, Judge Lorna G. Schofield of the U.S. District Court, Southern District of New York largely denied the defendants’ motion to dismiss, and upheld the lead plaintiffs’ allegations that the defendants made material misrepresentations and omissions regarding Credit Suisse’s risk limits and controls, including the repeated breach of its purportedly binding limits.
The case name is: City of Birmingham Firemen’s and Policemen’s Supplemental Pension System v. Credit Suisse Group AG, et al., Case No. 1:17-cv-10014, U.S. District Court, Southern District of New York.