On February 19, 2019, Judge Lorna G. Schofield, of the United States District Court for the Southern District of New York, recently ruled that investors in Credit Suisse Group AG (“Credit Suisse”) sufficiently alleged that the bank concealed risk management issues in its fixed-income franchise before $1 billion in write-downs in 2016.
The class, headed by four pension funds, is accusing Credit Suisse and several of its executives of publishing misleading financial reports concerning procedures to monitor and control risk, the extent to which the bank was involved in collateralized loan obligations (“CLOs”) and distressed debt, and the level of risk accompanying those investments.
Credit Suisse’s alleged misrepresentations gave shareholders the impression that the positions were “entirely benign,” while, in realty, the bank had accumulated a $4.3 billion exposure to CLOs and distressed debt instruments, which led to the 2016 write-downs and losses to investors.
Judge Schofield sided with the class, determining it had adequately demonstrated that Credit Suisse knowingly made substantial misstatements or omissions about its risk controls and limits, which caused investor losses.
“Construing the allegations in the light most favorable to the plaintiffs, the complaint sufficiently pleads that CS’s statements regarding its ‘binding’ risk limits were materially misleading in light of the complaint’s allegations that CS routinely revised its limits,” opined Judge Schofield. “In light of defendant’s statements about CS’s risk controls and trading limits, defendants’ failure to disclose that it could raise, and in fact was repeatedly raising risk limits with respect to CS’s illiquid investments constitutes a material omission.”
The suit began in December 2017, with the investors accusing Credit Suisse of violating the Exchange Act by misrepresenting or omitting material information on its financial reports, leading to an 11 percent decline in the price of its U.S. shares of foreign companies, also known as American depositary receipts (“ADRs”).
Plaintiffs allege that as Credit Suisse increased its investments in fixed-income markets, including asset-backed securities, CLOs, and residential mortgage-backed securities, it amassed more than $4.3 billion in fixed-income positions: $3 billion in distressed debt and $1.3 billion in CLOs.
Credit Suisse announced in February 2016 that it had taken a $633 million write-down because of mark-to-market losses in its CLO and debt positions. The announcement was followed by a single-day drop in price of Credit Suisse’s ADRs from $16.69 to $14.89.
Investor losses were exacerbated in March 2016, when Credit Suisse announced an additional $346 million write-down against its first-quarter earnings, bringing total losses to approximately $1 billion.
The legal team at Shepherd, Finkelman, Miller & Shah, LLP (“SFMS”) has significant experience litigating class action and securities matters. Please contact Nick Lussier or Chiharu Sekino if you have a similar matter to discuss. We can also be reached toll-free at (866) 540-5505.
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