Credit Suisse Reaches $495 Million Settlement for Fraud in Toxic Mortgage-Backed Securities Before 2008 Financial Crisis with Total $5.8 Billion Fine Since 2017, Traders Unwilling to Hold Risky Loans But Sells Loans to Investors
18th October 2022 | Hong Kong
Credit Suisse has reached a $495 million settlement ($300 million in restitution for investors) for fraud in the sale of toxic mortgage-backed securities between 2006 to 2007 (before the 2008 Global Financial Crisis), with Credit Suisse paying a total $5.875 billion fine since 2017 (United States Department of Justice $5.28 billion in 2017; New York Department of Justice $10 million in 2018, New Jersey Attorney General Office $495 million in 2022). Credit Suisse will make a one-time payment of $495 million to fully resolve claims tied to more than $10 billion. In the investigation, Credit Suisse traders had warned of risky nature of the loans and were not willing to hold the loans, and instead, Credit Suisse sold the loans to investors (institutional investors, including public and private pension funds, charities, educational institutions, mutual funds, hospitals, and money managers). Credit Suisse also pocketed tens of millions in reimbursements from loan originators arising out of defective loans, instead of transferring the funds to trusts which owned the loans. New Jersey: “The State alleged Credit Suisse made material misrepresentations in the offering documents about the risks of the RMBS, including by failing to disclose material defects of the underlying mortgages, in violation of New Jersey’s securities laws. As alleged, Credit Suisse perpetrated much of the fraud from its office in Princeton, New Jersey, which was central to Credit Suisse’s business of selling the toxic RMBS to hundreds of institutional investors nationwide, including public and private pension funds, charities, educational institutions, mutual funds, hospitals, and other money managers, who in turn invested the retirement funds of workers and the savings of individual retail investors.” See below for announcement on Credit Suisse $495 million settlement:
“ Credit Suisse Reaches $495 Million Settlement for Fraud in Toxic Mortgage-Backed Securities Before 2008 Financial Crisis with Total $5.8 Billion Fine Since 2017, Traders Unwilling to Hold Risky Loans But Sells Loans to Investors “
Credit Suisse Group announces today that it has reached a final settlement with the New Jersey Attorney General (NJAG) related to its Residential Mortgage-Backed Securities (RMBS) business with transactions dating back to before 2008. Under the terms of the settlement, Credit Suisse will make a one-time payment of USD 495 million to fully resolve claims tied to more than USD 10 billion of RMBS at issue, for which the NJAG had alleged over USD 3 billion in damages in a litigation case filed in 2013. Credit Suisse is pleased to have reached an agreement that allows the bank to resolve the only remaining RMBS matter involving claims by a regulator and the largest of its remaining exposures on its legacy RMBS docket. The settlement, for which Credit Suisse is fully provisioned, marks another important step in the bank’s efforts to pro-actively resolve litigation and legacy issues.
Credit Suisse $495 million settlement with New Jersey Attorney General Office
NJ Attorney General Office Reaches $495 Million Settlement in Principle with Credit Suisse to Resolve Allegations of Fraud and Deceit in Sale of Toxic Mortgage-Backed Securities that Fueled 2008 Financial Crisis
The Office of the Attorney General announced today that the New Jersey Bureau of Securities has reached a $495 million agreement in principle with Credit Suisse Securities (USA) LLC, Credit Suisse First Boston Mortgage Securities Corp., and DLJ Mortgage Capital, Inc. (collectively “Credit Suisse”) that would resolve a lawsuit arising from the offer and sale of toxic residential mortgage-backed securities (“RMBS”) from 2006 to 2007 in the run-up to the 2008 financial crisis. Once final, the deal will be one of New Jersey’s largest civil monetary recoveries in the state’s history, and will include, among other things, approximately $300 million in restitution for investors nationwide.
The State alleged Credit Suisse made material misrepresentations in the offering documents about the risks of the RMBS, including by failing to disclose material defects of the underlying mortgages, in violation of New Jersey’s securities laws.
As alleged, Credit Suisse perpetrated much of the fraud from its office in Princeton, New Jersey, which was central to Credit Suisse’s business of selling the toxic RMBS to hundreds of institutional investors nationwide, including public and private pension funds, charities, educational institutions, mutual funds, hospitals, and other money managers, who in turn invested the retirement funds of workers and the savings of individual retail investors. Credit Suisse will neither admit nor deny these allegations as part of the anticipated settlement.
As a result of New Jersey’s action, Credit Suisse will for the first time provide restitution to these investors in connection with an action brought by a regulatory authority.
Under the agreement in principle, Credit Suisse will also pay a civil monetary penalty of $100 million, which would be the largest ever secured by the Bureau. It would also provide for the appointment of a Claims Administrator to help distribute the restitution to investors, and permanently enjoin Credit Suisse from future violations of New Jersey’s securities laws.
“This agreement in principle holds Credit Suisse accountable for the loss of billions of dollars that helped put the nation in financial crisis,” said First Assistant Attorney General Lyndsay V. Ruotolo. “It has taken more than a decade of investigation and litigation to reach this historic result, but we never wavered in our resolve to get here.
The recovery Credit Suisse has agreed to pay reflects the magnitude of harm it inflicted on the public and underscores New Jersey’s commitment to vigorously pursue cases, no matter the challenges, to protect the financial interests of the investing public.”
“This settlement will provide meaningful financial relief to investors nationwide who were left holding the bag in the fallout from Credit Suisse’s conduct. It also sends a clear message that we will not allow New Jersey to be used as a base of operations for unlawful schemes targeting investors,” said Acting Bureau Chief Amy G. Kopleton. “The Bureau will continue to protect the integrity of New Jersey’s financial services industry by bringing cases against firms that unlawfully drive up profits by withholding vital information about the products they sell.”
Under Governor Phil Murphy, the Attorney General’s Office has been committed to protecting investors and consumers of financial products and services – both to hold financial institutions accountable when they harm New Jersey residents and to deter the kinds of corporate wrongdoing that contributed to the 2008 financial crisis. Today’s settlement in principle is the latest result of that commitment.
The State’s lawsuit, filed in Superior Court, Chancery Division, Mercer County, alleges that Credit Suisse packaged billions of dollars’ worth of defective residential loans into publicly traded RMBS, which were sold to unsuspecting investors through registration statements, prospectuses, and other offering materials containing fraudulent representations about the quality of the underlying loans.
Additionally, the lawsuit alleged that Credit Suisse failed to disclose to investors the wholesale abandonment of underwriting guidelines designed to ensure that the mortgage loans underlying its securities trusts were made in accordance with appropriate lending guidelines; that numerous loan originators had poor track records of defaults and delinquencies; and that some loan originators had even been suspended from doing business with Credit Suisse, according to the allegations.
Other material information that was not disclosed, according to the State’s lawsuit, included that:
- A significant number of the loans which Credit Suisse had examined were underwater with combined loan-to-value ratios of more than 100 percent;
- Credit Suisse’s traders had warned against the risky nature of certain types of loans, and were not willing to hold them on Credit Suisse’s own books at the same time Credit Suisse was unloading them to investors; and
- Credit Suisse had pocketed tens of millions of dollars in reimbursements from loan originators arising out of defective loans, without passing those funds along to the trusts that actually owned the loans.
The agreement in principle with Credit Suisse is the result of investigators, analysts, attorneys, and others who spent years in dogged pursuit of redress for investors who suffered devastating financial losses as a result of the sale of toxic RMBS by Credit Suisse.
In January 2017, the U.S. Department of Justice (“DOJ”) reached a $5.28 billion settlement with Credit Suisse in connection with alleged misconduct in the packaging, securitization, issuance, marketing and sale of RMBs. In December 2018, New York reached a $10 million settlement with the bank in connection with its sale of RMBS. While the settlement with the DOJ required Credit Suisse to provide relief to underwater homeowners, distressed borrowers and affected communities in the form of loan forgiveness and financing for affordable housing, neither settlement required Credit Suisse to provide restitution to investors. The agreement in principle reached here would create a nearly $300 million restitution fund.
The Credit Suisse matter is being led by Assistant Attorney General Brian F. McDonough, along with Deputy Attorneys General Toral M. Joshi, Brian DeVito, and Nicholas Dolinsky in the Division of Law’s Affirmative Civil Enforcement Practice Group, and Acting Bureau Chief Amy G. Kopleton from the Bureau of Securities. Many Division of Law attorneys have helped the Bureau achieve this historic settlement, including Deputy Attorneys General Evan A. Showell, Elisabeth E. Juterbock, Jesse Sierant, and Andrew Yang. New Jersey Bureau of Securities Investigator Delfin Rodriguez worked on the Bureau’s investigation of the matter.
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