The Financial Times reports tonight on how the hasty, forced acquisition of Credit Suisse by UBS has generated litigation in addition to the monster RICO/Swiss Law suit, Stevenson v. Thornberg, that we wrote about most recently last week.
Stevenson v. Thornberg targets four US Credit Suisse legal entities, a large number of executives and board members, and KPMG and some of its executives for over a decade of stunning abuses. That include losses on Archegos and Greensill, recidivist money laundering, conspiring with KPMG to hide inadequate controls (including records alteration and destruction and criminal charges with respect to circumventing PCAOB supervision), setting up and looting a fraudulent company, hidden bonus pools, as well as the more typical mortgage frauds.
We’re providing another mini-update on Stevenson v. Thornberg, in the form of an amicus brief by the highly respected Better Markets, a US activist not-for-profit that regularly weighs in on pending laws and regulations in the finance area, and also promoted more aggressive enforcement. We’ve posted the informative and very readable brief below. We’ll discuss it in a bit more detail soon, but the short version is it supports the plaintiffs’ recent opposition by the to the defendants’ Motion to Dismiss. The brief explains why it is valid and important to use the US RICO statute against law-breaking foreign corporations.
But we’ll first turn to the additional legal controversies and potential damages resulting from how the Swiss government and its financial regulator, Finma, managed the Credit Suisse collapse. Lehman was a huge case study in why big international financial institution failures are hugely disruptive. And despite some efforts to devise living wills so large banks could fail without taking the financial system with them, those efforts were quietly shelved after it became apparent that too many activities deemed necessary for commerce did not fall tidily into legal entity or even country boundaries.
So rather than bankrupting Credit Suisse, which would have stopped creditor claims and forced a court to sort out who was owed what, UBS bought Credit Suisse at a discount. That meant legal and creditor claims against Credit Suisse were inherited by UBS. And as the Financial Times described, the hasty rescue has generated $9 billion in new claims.
The pink paper divides them into the parties being sued: Finma, the regulator, for writing off $17 billion of so-called “Additional Tier 1” bonds, the Swiss government, and UBS. Finma is charged with violating the creditor hierarchy and the process for handling distressed AT1 bonds. From the Financial Times:
The disputes mainly relate to AT1s, a form of bank debt that can be converted to equity or wiped out when lenders run into trouble. Holders of Credit Suisse’s AT1s claim the trigger that would have allowed the bonds to be written down — a so-called viability event — did not happen and so Finma acted rashly in wiping them out.
By forcing losses on AT1 investors while allowing equity investors to receive some value for their shares, Finma upended the traditional capital hierarchy: a move from which the European Central Bank and Bank of England were quick to distance themselves.
Some employees are filing suits over a form of contingent capital they got as bonuses that was similarly wiped out by Finma in the merger. Amusingly, any that are defendants in Stevenson v. Thornberg are subject to having any recoveries from Finma eaten up by Stevenson v. Thornberg damages (remember, they are joint and several liabilities on the Swiss law related claims).
As for Switzerland, some investors are using the ISDA arbitration process, arguing that the forced merger was a government expropriation (the shareholders got only half of the price of the shares on its last trading day). Another suit is targeting Switzerland in US courts:
Another firm, Quinn Emanuel, is exploring an alternative approach: suing Switzerland through the US courts. Sovereign nations are usually immune to being sued in the US. But the firm believes they can convince a judge that investors should be able to sue Switzerland in this case.
Investors in another case brought by Quinn Emanuel involving YPF, the Argentine oil major, recently won an award of $16bn through the New York courts after a judge ruled that the South American country had unlawfully renationalised the company.
UBS is also being sued both for the AT1 bond writeoffs and for the cramdown of Credit Suisse shareholders. One of the arguments here is the $29 billion profit UBS recorded last quarter, almost entirely due to gains on the Credit Suisse deal, means the sale price was too low. Of course, true to form, UBS is claiming those are mere accounting gains. Funny how profits are depicted as meaningless when they might be clawed back.
As for the Better Markets amicus brief, I
00 – 2023-10-27 – Amicus Curiae Opposition to Motion to Dismiss