Credit Suisse Group
) has been pressed with charges of a civil fraud by the New York
Attorney General (AG), Eric Schneiderman. This is the second
lawsuit of its kind to be filed by the AG, the first being
JPMorgan Chase & Co.
) in October.
CREDIT SUISSE (CS): Free Stock Analysis
JPMORGAN CHASE (JPM): Free Stock Analysis
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The litigation has been filed with the backing of the Residential
Mortgage Backed Securities Working Group, which was formed by
President Barack Obama in January to investigate and impeach the
accused organizations for misconducts that eventually led to the
financial crisis. The group consists of officials from the U.S.
Justice Department, the Securities and Exchange Commission (SEC),
the FBI and other federal and state officials.
The AG alleged that Credit Suisse defrauded a large number of
mortgage bond investors by misrepresenting the quality of loans
underlying residential mortgage backed securities (RMBS) it
sponsored and underwrote in the 2006-2007 period. Consequently,
this led to a loss of $11.2 billion to the investors.
Similar to the JPMorgan case, this lawsuit has also been filed
under New York's Martin Act (that does not require proof of
intent to mislead). Apart from seeking damages, the litigation
demands proper compensation for the investors who were defrauded
by deceptive practices as well as stoppage of such fraudulent
The lawsuit alleges that Credit Suisse, while selling the RMBS,
convinced the investors that the underlying loans had been
evaluated properly and were under constant vigilance. However,
the company failed to do either. Further, the executives ignored
various negative signals that showed that the underlying loans
were most likely to fail and yet continued to bundle them as RMBS
and sold them to investors.
Credit Suisse also failed to take corrective measures once the
flaws were detected. The company was more focused on maintaining
high volume of loans from the mortgage originators rather than
concentrating on removing defective loans from the underlying
Credit Suisse's spokesperson, while commenting on the litigation,
stated the company will challenge the allegations.
Similar Cases and Other Settlements
This is the second time in the past week that Credit Suisse's
name has cropped up in relation with the sale of faulty RMBS.
Last week, Credit Suisse and JPMorgan agreed to resolve the
allegations leveled by the SEC by paying a total compensation of
nearly $416.9 million. The allegations were related to the sale
of faulty RMBS by these banks prior to the financial crisis of
Further, as mentioned above, JPMorgan was also dragged to court
by the New York AG. The AG alleged that Bear Stearns - acquired
by JPMorgan in 2008 - defrauded a large number of mortgage bond
investors. As per the complaint, the investors suffered losses
aggregating to about $23 billion - nearly 26% of the original
value - as a result of flawed documents used by Bears Stearns
while selling RMBS in the 2006-2007 period.
Legal troubles such as this are likely to result in mounted
expenses and affect the top line of many financial institutions.
However, the measures being undertaken by the regulatory and
legal authorities to come down hard on such unwarranted
activities of these institutions will deliver huge relief to the
Credit Suisse currently retains a Zacks #3 Rank, which translates
into short-term Hold rating. We believe that the legal hassles
encountered by the company can generate downward estimate
revisions leading to deterioration in the Zacks Rank.