A Michigan pension system has sued Credit Suisse over the dual scandals that have embroiled the Swiss bank this year regarding troubled clients Greensill Capital and Archegos Capital Management.
The City of St. Clair Shores Police and Fire Retirement System, in a purported investor class action, alleged that the bank and several of its key executives “concealed material defects in the company’s risk policies and procedures and compliance oversight functions and efforts to allow high-risk clients to take on excessive leverage, exposing the company to billions of dollars in losses.”
The named defendants in what it termed the bank’s “fraudulent scheme” include Credit Suisse CEO Thomas Gottstein; Lara Warner, the chief risk and compliance officer until April; and David Mathers, its CFO.
The bank concealed “operational landmines from Credit Suisse investors, which caused the price of Credit Suisse securities to be artificially inflated,” lawyers for St. Clair argued in their complaint, filed in the Southern District of New York on Friday.
It noted that defendants “issued materially false and misleading statements regarding the company’s business metrics and financial prospects” and “undertook actions indicating that Credit Suisse securities were substantially undervalued, such as a massive stock buy-back program.”
The complaint, quoting liberally from news reports, laid out the events surrounding the two scandals, both of which came to a head in March.
Greensill, which filed for insolvency protection on March 8, had been financed by loans provided by specialized supply-chain investment funds managed by the bank and marketed to its asset management clients, including pension funds. By last July, when Greensill lost its insurance from Tokio Marine, Credit Suisse knew Greensill was under investigation by German banking regulators, according to the lawsuit.
“Critically, Credit Suisse made a $160 million bridge loan to Greeensill in October 2020 that was approved by defendant Lara J. Warner over objections by Credit Suisse’s own risk managers,” the lawsuit alleged.
On March 1, 2021, Credit Suisse suddenly froze $10 billion in funds that were invested in Greensill’s financial products and later acknowledged $2.3 billion worth of problematic loans in its Greensill funds.
Within a few weeks, Credit Suisse was reporting $4.7 billion in losses from another client, Bill Hwang’s Archegos family office. The lawsuit alleged that Archegos had capital of $10 billion that it leveraged to gain exposure to $50 billion worth of shares, through total return swaps.
But while several banks that had extended such leverage to Archegos liquidated “billions of dollars’ worth of securities at fire-sale prices after Archegos failed to meet a margin call” on March 26, Credit Suisse was left holding the bag as prices fell.
“By the time Credit Suisse tried to liquidate its own positions underlying Archegos swap contracts over the ensuing weekend, prices had already collapsed and Credit Suisse quickly racked up billions of dollars in losses,” according to the complaint.
After that, it noted, S&P Global Ratings downgraded Credit Suisse’s corporate debt rating “and further lamented that ‘[m]anagement of its relationships with the U.S. hedge fund and Greensill group also has potential to damage the bank’s reputation, which was already tarnished following high-profile governance issues in 2020 and culminated with its CEO’s departure,’ referring to defendant Thomas Gottstein’s predecessor stepping down after a corporate espionage scandal.”
The complaint also mentioned an April 8 Wall Street Journal article, “Credit Suisse Ignored Warnings Before Archegos and Greensill Imploded,” which reported that “Credit Suisse executives had long known about the excessive risks posed by the Company’s Archegos and Greensill investments, but failed to disclose these facts to investors.”
It also quoted from Securities and Exchange Commission filings, company press releases, and conference call transcripts regarding the bank's capital, risk controls, and prospects. Such statements were “false and misleading,” the complaint alleged.
In a conference call last year, CEO Gottstein said, “Today, we are outlining our ambitious and achievable growth agenda for 2021 and beyond, including broad-based investment initiatives to accelerate growth in our wealth management-related businesses and our Investment Bank.”
“We continue to believe wealth management is one of the most attractive segments in financial services, notably in Asia Pacific, and we also expect to further expand the connectivity between our investment bank and the wealth management-related divisions.”
But, plaintiffs alleged, “Credit Suisse’s co-mingling of its lending, asset management, and private wealth management functions and imprudently aggressive pursuit of fees had materially diminished the Company’s ability to properly assess and manage its own risk exposure to high-risk clients and potential liabilities from client losses.”
In the wake of the losses, Credit Suisse shelved plans to increase its dividend and continue its buyback program.
Brian Chin, the CEO of its investment bank, and defendant Warner have stepped down, and Credit Suisse has launched separate external investigations into both the Archegos and Greensill debacles with a “tactical crisis committee” to deal with the fallout, the complaint noted.
Credit Suisse declined to comment.