Credit Suisse Forced Marriage Gins Up $9 Billion in Legal Claims in Addition to RICO/Swiss Law Suit for Longstanding Misconduct and Crimes; Amicus Brief by Better Markets Supports RICO Claim

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.

The Better Markets amicus brief focuses on the forum non conveniens issue with respect to the RICO claims. An overview of forum non conveniens from Cornell Law School:

Forum non conveniens refers to a court’s discretionary power to decline to exercise its jurisdiction where another court, or forum, may more conveniently hear a case. Dismissing a case on forum non conveniens grounds is not a bar for res judicata purposes and, therefore, does not prevent a plaintiff from re-filing their case in the more appropriate forum. This doctrine may be invoked by either the defendant, or sua sponte by the court.

Even if a plaintiff brings a case in an inconvenient forum, a court will not grant a forum non conveniens dismissal unless there is another forum that could hear the case and potentially recover damages. Additionally, courts will not grant a forum non conveniens dismissal where the alternative forum’s judicial system is grossly inadequate. For example, an American court would not grant a forum non conveniens dismissal where the alternative forum was Cuba.

Courts typically use a 2-part test to determine whether they will grant a defendant’s forum non conveniens motion. The first part is a balancing test of both private and public factors, and the second part looks at what adequate alternative courts are available.

  • Balancing Test
    • Private Factors
      • Ease of access to evidence
      • Interest of the two parties in their connections with the respective forums
      • The plaintiff’s chosen court would be burdensome to the defendant
      • If a court finds this factor to be true, then that is often sufficient to dismiss the case and accept a forum non conveniens claim
      • Ease of obtaining witnesses
      • Enforceability of judgment
    • Public Factors
      • Whether the trial would involve multiple sets of laws, thus potentially confusing a jury
      • Having juries who may have a connection to the case
      • Local interest in having local interests heard at home
      • Having the trial in a place where state laws govern
  • Adequate Alternative Inquiry Test
    • The defendant must offer an alternate court that is able to hear the case
    • The alternate court must have the ability to provide a remedy to the plaintiff

The plaintiffs already addressed the private factors at length. Nearly all the defendants are US citizens and/or US residents, many near New York. The records are overwhelmingly in the US. The witnesses are overwhelmingly in the US.

Better Market argues it can provide unique perspective on the public factor test. Better Markets cites a precedent in Olin Holdings, and I like its formulation better:

the private factors to be considered are: (1) the relative ease of access to sources of proof; (2) the convenience of willing witnesses; (3) the availability of compulsory process for attaining the attendance of unwilling witnesses; and (4) the other practical problems that make trial easy, expeditious, and inexpensive. The public interest factors are: (1) court congestion; (2) avoiding difficult problems in conflict of laws and the application of foreign law; (3) the unfairness of imposing jury duty on a community with no relation to the case; and (4) the interest of communities in having local disputes decided at home.

Better Markets argus forcefully that the US has a strong interest in having corporations that serve as operators in our capital markets not be able to hide from the consequences of their misconduct by evading our courts. The filing also argues for the Congressional aims in making RICO punitive (treble damages) as a deterrent to concerted criminal misconduct, and how it further sought to create “private attorneys general” in providing for civil RICO cases.

The filing gives other reasons why the US court not exercising jurisdiction would disadvantage the plaintiffs:

The RICO statute is uniquely designed for multiyear conduct by numerous actors, as it provides a unique remedy in the United States for precisely the sort of long-running scheme perpetrated by Credit Suisse, its executives, and its auditor, KPMG. RICO claims based on mail and wire fraud differ from conventional fraud claims because first-party reliance is not required for a civil plaintiff to recover under the RICO statute…

Conventional fraud-based claims, which may be available in other forums, are far more restrictive. Plaintiffs must plead individual reliance on particular false statements, and the false statements themselves must result in the plaintiffs’ injuries. In cases involving a multiparty fraudulent scheme, spanning several years, and based on multiple predicates of mail and wire fraud, conventional fraud-based claims may not be sufficient to address the overarching fraudulent scheme, including related conduct and parties. Indeed, in such circumstances, a RICO plaintiff can recover based on third-party reliance, such as defendants’ efforts to deceive the press, public, regulators, or some other third party, which in turn caused injury.

There’s more grist for this argument, but I suggest you read this lucid and compact filing. And wish the plaintiffs good luck!

00 - 2023-10-27 - Amicus Curiae Opposition to Motion to Dismiss
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  1. David in Friday Harbor

    Thank you for this explanation of how the Swiss government’s Finma subordination of “Additional Tier 1 Bonds” and shareholder cram-down gifted UBS a $29 Billion profit for taking over a worthless entity that should have been bankrupt. The “free market” for thee; “socialism” for me!

    As a former prosecutor, I love the RICO framing. Modern Banking is nothing more than a confidence scheme. As always, the marks thought that they were “in” on the con. Until they weren’t…

  2. Susan the other

    This sounds like the end of an era. Very interesting mess, loaded with schadenfreude. Law has a way of milling things down to very fine grains. So when it comes to ISDA arbitration of claims against a financial behemoth like Switzerland, this Credit Suisse RICO trial seeking the most expeditious court in another country is mind boggling. Even though (or because?) the US is probably the lions’ den of secrecy. What does the world do when it is confronted with the ultimate contradiction? I hope there is follow-up on this that dummies like me can understand. Could be the story of the century.

  3. upstater

    Here we are 15 years after Lehman, 22 after Enron, 30+ after the S&L crisis. And it just keeps coming. The corruption is endemic. Thank you for the update… it sure would be *nice* if we had banking as a public utility and not a transnational criminal enterprise. Doesn’t China execute some of these guys?

    1. Yves Smith Post author

      The irony here is that the the Bill Lerach, who is a consultant on this case and the presumed drafter of these filings, was the lead actor in securities fraud litigation over Enron, Worldcom, Dynergy, and Time Warner/AOL. Former Financial Crisis Inquiry commissioner Byron Georgiou worked with Lerach on those cases and is now working with Lerach (and his formidable wife, litigator Michelle Learch) on Credit Suisse and other recent cases filed by Michelle Lerach’s firm. So this bad behavior does not end, just comes back in different guises.

  4. Old Sarum

    Did Argentina actually cough up the $16bn mentioned, or does this genre of legal action just run and run?


    1. Yves Smith Post author

      Winning a judgement and collecting are two different matters. However, with that ruling, the plaintiffs could get any international financial institution to turn over that amount of $ to them. I think it was before this ruling, but I recall reading of an Argentine oil ship (for the tanker? The cargo?) being seized in connection with a judgement against Argentina.

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