Greensill and Archegos losses prompt Credit Suisse class action

Credit Suisse is facing a proposed class action in New York, over allegations it hid defects in its risk policies so it could extend excessive leverage to trade finance provider Greensill and family office Archegos Capital.

In a complaint lodged in a New York district court on 16 April, a Michigan-based pension fund that purchased Credit Suisse American depositary receipts (ADRs) said the Swiss bank had concealed “operational landmines” from its investors.

Credit Suisse and some of its directors issued materially false and misleading statements, the complaint says, which led to its ADRs being traded at artificially inflated prices.

But following a series of corporate scandals, including Greensill’s collapse and Archegos’ multi-billion-dollar blowout last month, the ADR prices plummeted.

Greensill collapse

Credit Suisse froze US$10 billion of funds linked to Greensill in early March, seven days before the latter filed for insolvency protection in the UK and Australia, with subsequent processes entered in Germany, the US and Singapore.

The move came after a group of insurers said last July that they would not renew their coverage for US$4.6 billion worth of Greensill assets – making it harder for Credit Suisse to market and sell its securities.

But three months after the insurers announced their decision, Credit Suisse made a US$160 million bridge loan to Greensill, which was allegedly approved by one of the defendants named in the suit, former chief risk and compliance officer Lara Warner.

Greensill was not able to repay the loan when it fell into insolvency, and over 1,000 investors were unable to exit their positions, according to the Financial Times.

The Michigan pension fund that hopes to act as a class representative for other ADR holders, City of St Clair Shores Police and Fire Retirement System (SCSPF), said Credit Suisse had ignored “numerous red flags” in connection with the Greensill funds.

“[It] overrode the concerns of the company’s in-house credit-structuring team in packing and selling billions of dollars’ worth of Greensill-linked securities to investors,” the complaint says.

Archegos blowup

Later in March, Credit Suisse was rocked with more huge losses resulting from its exposure to family office hedge fund Archegos.

Managed by New York-based banker Sung Kook Hwang, Archegos managed to grow its assets from a starting pot of US$200 million in 2013 to US$10 billion last year.

Hwang previously ran Tiger Asia Management, a US hedge fund, but received an SEC ban on managing other people’s money in 2012 after he pled guilty to insider trading in Chinese bank stocks.

Archegos’ investment holdings are primarily in the form of total return swaps, in which stocks are held by banks that broker investments. The swaps allow investors to bet on stock prices, while the banks that own the underlying shares pay the investor a performance-related return.

According to the suit, Archegos used the leverage provided by its swap strategy to gain exposure to more than US$50 billion worth of securities.

“Unbeknownst to investors and regulators, several large brokerage banks, including Credit Suisse, had each simultaneously allowed Archegos to take on billions of dollars of exposure to volatile equities through swap contracts, dramatically elevating the risk posed by these concentrated positions,” the complaint says.

Archegos prime brokerage banks became concerned at the end of March, after the market value of some of the stock shares underlying their swap positions declined.

Several of the banks, including Morgan Stanley and Goldman Sachs, began liquidating billions of dollars of securities at fire-sale prices after Archegos failed to meet a margin call.

But prices had already collapsed by the time Credit Suisse tried to liquidate its own positions in the following days, and it racked up billions of dollars in losses, SCSPF said.

The complaint says the Swiss bank conspired with Hwang to allow Archegos to covertly take on billions of dollars in “excessively concentrated and risky positions” – placing the risk of loss on Credit Suisse and its investors.

It also alleges the bank understated its exposure to risk and overstated its Tier 1 capital ratios in public statements.

“Credit Suisse’s internal controls were inadequate to ensure that the company’s potential liability to customers and losses arising from its exposure to customer losses were properly accounted for, managed and disclosed to investors,” SCSPF said.

Earlier this month, Credit Suisse revealed it had taken a US$4.7 billion hit from Archegos losses and said Warner and Brian Chin, CEO of its investment bank, were stepping down from their positions immediately.

SCSPF is aiming to certify a class of investors that purchased Credit Suisse ADRs between 29 October and 31 March, and has asked the court to award them damages to cover the economic losses allegedly sustained.

Credit Suisse did not immediately respond to a request for comment from GBRR’s sister publication, Global Restructuring Review (GRR).

This article was originally published on 20 April on GRR. The original is available here.

In the US District Court for the Southern District of New York

City of St Clair Shores Police and Fire Retirement System v Credit Suisse Group AG et al

  • Judge Naomi Reice Buchwald

Counsel to City of St Clair Shores Police and Fire Retirement System

  • Robbins Geller Rudman & Dowd

Partner Samuel Rudman in New York

In Greensill’s German bankruptcy

Insolvency administrator to Greensill Bank

  • CMS

Partner Michael Frege in Leipzig

Counsel to Greensill

  • Allen & Overy

Partners Alexander Behrens and Sven Prüfer in Frankfurt

Counsel to Greensill board of directors

  • Pluta

Partners Stefan Meyer and Torsten Gutmann in Hanover, and Christian Kaufmann in Bremen

  • BRL Boege Rohde Luebbehuesen

Partners Stefan Denkhaus and Dominik Demisch in Hamburg

Counsel to BaFin

  • Gleiss Lutz

Partners Maximilian von Rom and Eva Reudelhuber in Frankfurt and Andreas Spahlinger in Stuttgart

Counsel to the Association of German Banks EdB

  • Clifford Chance

Partners Marc Benzler and Christine Gärtner in Frankfurt

  • Latham & Watkins

Partner Markus Krüger in Frankfurt

In Greensill’s UK administration

Administrators to Greensill Capital UK (GCUK) and Greensill Capital Management (GCMC)

  • Grant Thornton

Partners Chris Laverty and Trevor O’Sullivan and director Will Stagg in London

Counsel to administrators

  • Allen & Overy

Partners Katrina BuckleyIan Field and Joel Ferguson in London

Counsel to Apollo Global Management

  • Kirkland & Ellis

Partners Kon Asimacopoulos and Thomas Jemmet in London

  • Mayer Brown

Partners Trevor Borthwick and Devi Shah in London

Counsel to Credit Suisse entities

  • Latham & Watkins

Partners Yen Sum and Jessica Walker in London

  • Morgan Lewis & Bockius

Partners Bruce JohnstonDavid Waldron and Paul Matthews with associates Abby Clifford and Paul Mesquita in London

In Greensill’s Australian administration

Administrators to Greensill Capital Pty Ltd

  • Grant Thornton

Partners Matt Byrnes in Melbourne, Phil Campbell-Wilson in Sydney and Michael McCann in Brisbane

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