Mammoth RICO Lawsuit Targets Credit Suisse, Many of its Directors and Execs, and KPMG for Over a Decade of Fraudulent, Reckless Conduct

Some firms never outgrow their formative periods. That’s confirmed by the astonishingly long list of criminal activity, looting, and recklessness perpetrated by Credit Suisse detailed in a recent RICO/class action suit, Lawtone-Bowles v. Thornburgh, represented by Michelle Ciccarelli Lerach of Bottini & Bottini.

As the filing embedded below describes, auditor KPMG aided and abetted Credit Suisse and is one of the three targets of the filings, along with the four Credit Suisse New York operations (acquired by UBS in a shotgun marriage) and various Credit Suisse supposed-to-have-been-responsible adults. KPMG was replaced in 2020 by PwC due to KPMG criminal misconduct, namely cheating on regulatory exams, including destroying records.1

Insistently recidivist money launderer Credit Suisse and the acquired firm that got it into the investment banking and securities businesses, First Boston, have checkered histories.

Credit Suisse became the first commercial bank to breach the Glass-Steagall wall by buying an interest in, and later control of, the storied “bulge bracket” investment bank First Boston in the late 1980s. First Boston had been a high flier in that heady decade. Its mergers & acquisitions chief Bruce Wasserstein was so feared that he’d sometimes be put on retainer to keep him on the sidelines. Its bond trading floor was second only to “King of Wall Street” Salomon Brothers.

But First Boston was bleeding out, balance-sheet wise, due to its bond chief Larry Fink (yes, the same Larry Fink of BlackRock) not fully appreciating the risk of the “nuclear waste” tranches of mortgage securitizations that First Boston retained. Hence the Fed allowed the rescue by Credit Suisse. Salomon Brothers’ days were also numbered.
The firm defyied the Fed by refusing to change its conduct after a Treasury bond trading scandal. The Fed forced four of its very top executives out, including CEO John Gutfreund. The trading shop had to be rescued by Warren Buffett.

Michael Lewis, for better or worse, immortalized Peak Salomon in his Liar’s Poker.2 But First Boston was iconic too. First Boston, more so than any other shop on Wall Street then, had many of its M&A bankers and bond traders adopt the “big swinging dick” look of the time of slicked-back hair, loud braces, and Gucci loafers.3 Raider Gordon Gekko modeled it:

Forgive the short walk down memory lane, but that background might make Credit Suisse’s remarkable record of criminal conduct as well as garden variety greed and incompetence seem less surprising.

The filing, embedded at the end of the post, contains a great deal of substantiation of its legal and factual arguments. It’s already gotten the attention of some legal sites for including two RICO charges, which provide for treble damages and attorneys’ fees.

The recitation of bad acts is overwhelming, even for those jaded by the sorry history of serially misbehaving banks. For instance, Credit Suisse effectively refused to get out of the money laundering business. It chose to carry on even after the US forced its Swiss competitor UBS to pay $780 million in fines, enter into a deferred prosecution agreement, and turn over customer names. In 2014, Credit Suisse paid a $2.6 billion fine and pled guilty to criminal conduct. Even so, it was fined repeatedly after that by US and European authorities. In March 2023, the US Senate released ““Credit Suisse’s Role in United States Tax Evasion Schemes,”summing up a two year investigation. Short version: Credit Suisse violated its 2014 plea deal.

That overview does not include indictments of former Credit Suisse execs for drug-related money laundering.

I’m skipping over Tunagate, or more accurately, Tuna Boats, which also produced Federal criminal convictions, this on the investment banking side of the house. And how about “Princelings Payoff,” which resulted in ~$80 million in fines and a non-prosecution agreement?

And then we have many many other train wrecks: an over $5 billion settlement for misrepresenting mortgage securities. Archegos. Greensill.

The legal arguments for why this case should be heard in New York seem persuasive to this non-lawyer. Note that this is a direct, and not a derivative suit, and is not a securities low filing either. The plaintiffs are not arguing that they bought or continued to hold Credit Suisse shares due to false statements. They are arguing they held shares and were harmed by management breaching various legal duties to shareholders, as well as laws and regulations that also had the effect of harming the company.4

I particularly like that this suit is getting its claws into the auditor. Generally, shareholders can’t sue lawyers and accountants that give what is arguably criminally corrupt advice to management. The CEO receives a “get out of jail free” card by protesting, “I was acting on expert advice. And shareholders can’t sue under the doctrine of secondary liability. As we wrote in ECONNED:

Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.

In other words, the only party that can normally sue an accounting firm for engaging in fraudulent conduct is his immediate client.

But Swiss law explicitly provides that shareholders can sue negligent auditors:

Art. 755 External Auditors’ Liability
All persons engaged in auditing the annual and consolidated accounts, the company’s foundation, a capital increase or a capital reduction are liable both to the company and to the individual shareholders and creditors for the losses arising from any intentional or negligent breach of their duties.

The filing notes:

The federal RICO statute is intended to protect United States citizens/residents like plaintiff and other Class members from the kind of criminal misconduct, i.e., RICO predicate acts, by the Credit Suisse entities and KPMG that occurred here in New York, damaging their property or business. Swiss law contains no provision restricting where a suit such as this can be filed. Nor does Credit Suisse’s corporate charter or articles.

The Swiss government is likely to be very unhappy about this filing, since a successful suit could produce billions in damages, more deserved reputational harm, and whack the already wobbly UBS, which was not at all keen to be forced to anchor itself to the Credit Suisse garbage barge. If bad courtroom results were to coincide with a period when Mr. Market was nervous about banks, it could even force the Swiss government into a bailout. But whether the Swiss government thinks it can intervene in this suit is an entirely different matter.

In any event, this suit is likely to air even more dirty laundry. Pass the popcorn.


1 Sometimes called the “steal the exam” caper, senior KPMG officers found out which audits would be reviewed by the Federal regulator, PCAOB. In the case of the expected exam at KPMG client Credit Suisse, which had a very bad record of compliance, they destroyed and altered records. It take a lot to get the PCAOB to saddle up, but five KPMG partners and staffers were found guilty of criminal charges. This filing argues (among other things) that had KPMG not cheated on its PCAOB review at Credit Suisse, many Credit Suisse lapses would have been exposed, reducing the level of damage to shareholders.

2 Tom Wolfe supposedly decided to make his Wall Street personage Sherman McCoy a bond trader after spending a day at Salomon Brothers. But Salomon was a Jewish firm, with scruffy gentiles also welcome. Sherman McCoy, like the bond traders at First Boston, was a WASP.

3 Mind you, some other bankers at other firms dressed like that too, although that plumage would have gotten demerits at Goldman, and I never met anyone there who sported that look.

4 Over my pay grade, but how do you establish the level of damages for shareholders over a long period? It seems not likely that all that many stuck with their positions for the entire time of all the bad conduct recited below.

00 Lawtone-Bowles v Thornburgh (2023-06-07) Conformed RICO Class Action Complaint2
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  1. George Weinbaum

    I disagree that “it takes a lot to get the PCAOB to saddle up”. If you look at the PCAOB’s 20-year history, you will see your statement is true with respect to the four CPA firms which audit 97% of SEC registrants by market cap. The PCAOB has never had an adjudicated case against a Big Four (BF) firm in 20 years. It has only had one against a BF partner. Not one of the 26 adjudicated cases. The BF audit about 45% of all SEC registrants by number. In 20 years, the PCAOB has brought only about 15% of its cases against the BF, the BF’s partners, the BF’s overseas affiliates and their partners. Run the numbers on this. The probability of this being due to chance is: < .001. A lot less. Less than one in a million.
    In my opinion, the PCAOB is the BF's cartel administrator.

  2. Aleric

    Call me sceptical that this is about cleaning up the banking industry. Given the ongoing project to colonialize Europe, and the unwillingness to regulate American tbtfs, perhaps this is more about reshoring these ‘criminal’ superprofits.

  3. Phichibe

    Yves, I loved the walk down memory lane. I think these details have been forgotten too often as we ask ourselves how exactly did the world in general and the united states specifically in what can only be called a global clusterfuck. And I wanted to add my two cents on CSFB back in the dot-com days. The name Frank Quattrone can not be allowed to slink away and acquire a patina of respectability. While his conviction was overturned on appeal and the government declined to re-prosecute, the record that Quattrone and his team put together at CSFB in Palo Alto (I think) during the bubble of the 90s was replete with insider dealing, pump and dump, ‘friends and families’ – another excuse for insider trading and backscratching among the .0001% who run the world, especially the world of finance. the world won’t miss these thieves but sadly, as our Lord demonstrated, we are all destined to die surrounded by thieves of one species or another. Sigh.

  4. ThirtyOne

    Credit Suisse’s remarkable record of criminal conduct
    Remarkable indeed.

    In February, Mr. Grassley and the budget panel’s chairman, Senator Sheldon Whitehouse, Democrat of Rhode Island, opened an investigation.

    Underlining the fraught nature of the investigation, senior Credit Suisse officials, including Mr. Diethelm, flew to Washington to meet with the committee about the issue on April 7, even as the bank was talking to UBS about its future, the people familiar with the matter said.

    The committee also pressed Credit Suisse about one of the issues Mr. Barofsky flagged: why it did not look for any accounts linked to a list of hundreds of names of people involved in a clandestine network that smuggled Nazis out of Germany after the war.

    Credit Suisse sent a letter to the committee last week saying it would investigate that list after all, the people familiar with the matter said.

  5. chuck roast

    Right on the heels of the massive failure of the proposed break-up of auditing firm EY. Described as a “radical breakup”, the big plan was to separate the firm into a consultancy business and a financial auditing business. This was all, apparently, to prevent increasing conflicts of interest. I mean really, you can’t just throw away such a fabulous grifting opportunity.

  6. dommage

    Thanks, Yves.
    This is an imaginative attempt in the Southern District of NY to circumvent the multiple jurisdictional obstacles that have been created since 1995, and a credit to Ms. Lerach. A pleasure to look over. The subject matter jurisdictional pivot on which all depends are the RICO claims; the only other subject matter jurisdictional claim made is “supplemental jurisdiction” which does not stand on its own.
    As it happens I persuaded my partners, in 1986, to bring a RICO securities-related action in the Southern District of NY against Icahn derivatively for Viacom, which he was then greenmailing. Two other plaintiffs firms, who in those days we often co-operated with, joined us. But not Milberg Weiss, so Lerach would have no direct knowledge of that case, but now unfortunately does, since it is an unpleasant 2d Circuit precedent.
    Our theory was that greenmailing was Hobbs Act extortion, an offense covered as “racketeering” when part of a pattern and practice, which we had no difficulty demonstrating as to Icahn. The very substantial premium over market price Icahn would demand management cause the target corporation pay for his stock to avoid his threatened fight for control (and the loss of their very comfortable jobs), came within the established definition of extortion.
    Our opponent was Dennis Block. We had quite a long fight before a rather slow-witted District Judge, who, years later, eventually granted the motion to dismiss.
    We had a close friend of mine, then Professor of Law at UT, argue the appeal. When I saw the panel I knew we had lost. It was chaired by my old tax professor, who very much disliked me (and, worse, my friend who was arguing), sitting by designation from the 9th Circuit. With Mahoney, an arch-reactionary (founder of the NY “Conservative Party”), at his side, it was over before it began. The very bright Amalya Kearse we might be able to persuade, but she was not going to make a hopeless effort. When, with a smile, she asked my friend “are you asking us to outlaw capitalism?” I half hoped, given that the outcome was certain, that he say “yes.”
    I trust Ms. Lerach will be readily able to distinguish our case.
    In between our bringing the case and its disposition, Sumner Redstone took control of Viacom, in part a result of Icahn throwing it into contest. He took over our (derivative) suit, as a corporation always has the option of doing. So at least some cash (as I recall very little) came the way of my then partners.
    I was reading the complaint on the very long checkout line at the Columbus Avenue Trader Joe’s this afternoon, where I was literally the only person masked. First time ever.

    1. Grayce

      Carl Icahn, the model for Gordon Gecko, is presently calling the shots at the formerly great company, Xerox. the name and structure changed: “Xerox Holdings,” a company without physical assets now but business ties to the original pieces. He said he would find new revenue inside the company. Interesting that KPMG is the accounting firm involved in the 1990s with an SEC investigation and fines for irregular accounting practices at the company.
      Icahn is the raider behind Pan Am, selling off its lucrative routes and then putting an anemic offering back on the market.

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