Credit Suisse has won a high-profile lawsuit at London’s High Court over the sale of $100 million of notes linked to residential mortgage-backed securities (RMBS) to German bank IKB in 2007.
The ruling dismissed allegations of systemic fraud made by Loreley Financing, an IKB subsidiary set up to purchase the notes as part of a collateralized debt obligation (CDO) transaction.
Lawsuit Alleged Systemic Fraud in RMBS Business
The lawsuit was filed by Loreley Financing, a special purpose vehicle created by German bank IKB to purchase $100 million of RMBS-linked notes from Credit Suisse in 2007. Loreley alleged that it was induced into buying the notes based on “false and dishonest representations” from Credit Suisse about their value and creditworthiness.
Central to Loreley’s lawsuit was the accusation that Credit Suisse engaged in a “systemic fraud” in relation to its RMBS securitization business in the lead up to the 2008 financial crisis. It alleged Credit Suisse knowingly packaged and sold poor quality mortgage loans into CDOs while providing false information to cover up the poor credit quality.
The lawsuit argued this alleged practice of misrepresenting RMBS credit quality constituted fraud. Loreley was seeking $100 million in damages from Credit Suisse over its purchase of the CDO notes in 2007, which ultimately defaulted during the financial crisis.
Credit Suisse Denied Any Systemic Fraud
In its defense, Credit Suisse strongly denied engaging in any systemic fraud with regards to its RMBS business. The bank acknowledged that some documentation deficiencies existed, but stated that this did not constitute fraud or any intent to deceive investors.
Credit Suisse contended that Loreley’s accusations of large-scale fraud were implausible and unsupported by evidence beyond a handful of isolated documents.
It stated that occasional documentation issues were not indicative of any dishonest business practices.
The bank also pointed out that investors like IKB were sophisticated institutions capable of conducting their own due diligence.
Ruling Finds No Evidence of Widespread Fraud
After an extensive trial that began in April 2023, Justice Sara Cockerill of the High Court ruled fully in favor of Credit Suisse on Friday.
In her judgement, Justice Cockerill stated that Loreley had failed to produce persuasive evidence of the alleged systemic fraud beyond limited documents.
She ruled that Loreley had not established proof of any dishonest intent by Credit Suisse to deceive investors. The judge acknowledged that some internal documents showed deficiencies in Credit Suisse’s RMBS business, including missing mortgage information. However, she found this did not rise to the level of deliberate fraud.
Justice Cockerill concluded that occasional documentation issues and mortgage due diligence lapses did not substantiate allegations of large-scale fraud. She ultimately dismissed Loreley’s $100 million lawsuit against Credit Suisse in its entirety.
Broader Implications of Ruling
The ruling is seen as an important vindication for Credit Suisse as it seeks to move beyond the legacy litigation from the financial crisis era. While Credit Suisse paid billions in settlements related to RMBS, it has consistently denied engaging in systematic deception.
Friday’s ruling reinforces that position, with the judge unwilling to infer fraudulent intent solely from limited instances of documentation shortcomings. For global banks still facing lawsuits related to pre-crisis mortgage securities, this ruling may make claims of systemic fraud harder to prove without conclusive evidence.
The decision also underscores that courts expect sophisticated institutional investors like IKB to exercise a degree of due diligence when purchasing complex securities. This raises the burden of proof for claims of deception against banks.
With Credit Suisse announcing a sweeping restructuring earlier this week following massive losses, the bank will be relieved to put this major RMBS lawsuit behind it. However, Credit Suisse still faces large investor lawsuits in the US over RMBS activities.
Friday’s ruling in London’s High Court represents a significant legal victory for the embattled Swiss bank as it seeks to restore its reputation and stabilize its business after years of scandals and losses.