Shareholders who suffered massive losses due to the sharp plunge in the stock price of European investment bank Credit Suisse (CS) have filed lawsuits against CS executives. Having averted a short-term liquidity crisis by receiving emergency funding from authorities, CS now faces litigation risks. The market is closely watching whether similar lawsuits, following the case of the bankrupt U.S. Silicon Valley Bank (SVB), will lead to a domino effect of legal battles.
According to Bloomberg on the 16th (local time), U.S. shareholders of CS filed a class-action complaint at the federal court in Camden, New Jersey, against Axel Lehmann, chairman of CS, and other current and former executives. The lawsuit claims that the company failed to disclose 'material weaknesses' such as inadequate internal controls in the 2021 annual report, which was the background of the stock price plunge.
The sharp decline in CS’s stock price was triggered by the discovery of accounting 'material weaknesses' such as inadequate internal controls in several years of recently released annual reports, which heightened financial concerns. This was compounded when Amar Al-Khudairi, chairman of the largest shareholder Saudi National Bank, stated that there was 'no plan for additional liquidity support.' As a result, CS shares listed on the Swiss Zurich Stock Exchange and the U.S. New York Stock Exchange both experienced steep declines.
In the complaint, the plaintiffs argue that if the company had disclosed financial risks earlier, losses from the stock price plunge could have been avoided. CS’s net assets decreased by 110 billion Swiss francs in the fourth quarter of last year, with most of the outflow occurring in October, when crisis rumors about CS intensified. However, in interviews with numerous media outlets in December last year, Chairman Lehmann stated that 'net asset outflows have stopped and customer attrition is decreasing.' Shareholders claim in the complaint that Lehmann’s statements constitute 'material misrepresentations' and that the company deliberately concealed risks.
According to the complaint, immediately after the fourth-quarter earnings report was disclosed on the 9th of last month, CS’s stock price listed on the New York Stock Exchange (NYSE) plummeted nearly 16%. The decline deepened earlier this month amid news that the 2022 annual report disclosure would be delayed.
The expectation that the stock price outlook is not positive also fueled this lawsuit. CS is currently discussing restructuring at a level akin to corporate dismantling and mergers and acquisitions (M&A) by competitors, led by authorities. Regardless of the outcome, it will be fatal to CS’s stock price. The credit default swaps (CDS) for one-year and five-year maturities, which indicate default risk, are also worsening. As of the previous day, CS’s CDS soared to 3700 basis points (bp; 1 bp = 0.01 percentage point) and 975 bp, respectively.
CS has been engulfed in crisis rumors for years as cumulative losses from investment failures snowballed. Chronic deficits caused by the U.S. Archegos incident and the March 2021 bankruptcy of the UK’s Greensill Capital, reports on material weaknesses in annual reports, and uncertainty over funding support from the largest shareholder have all combined as negative factors, preventing the stock price from recovering.
Meanwhile, SVB, which was closed due to liquidity issues on the 10th, was also sued for failing to disclose the vulnerability of its asset structure to high interest rates, which was the background of the crisis. On the 13th, SVB shareholders filed a class-action complaint at the federal court in San Jose, California, against Greg Becker, CEO of SVB Financial Group, the bank’s parent company, and CFO Daniel Beck, seeking damages.
SVB shareholders believe the crisis stemmed from SVB’s unique characteristics of having less cash assets and a higher proportion of securities investments compared to the average U.S. bank. They are demanding compensation for unspecified damages suffered by SVB investors between January 16, 2021, and the 10th of this month.
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