the CEP report eagerly awaited by the losers

The sinking of Credit Suisse on March 19, 2023 has legal consequences that are putting Switzerland to the test, both inside the country and abroad.

Daniel Zulauf / ch media

The report of the Parliamentary Inquiry Commission (CEP) raises immense expectations. This document, which is expected to be published before Christmas and will be around 500 pages long, is being awaited with great anticipation by a particular group of Credit Suisse losers.

These are the creditors whose obligations the bankrupt bank had completely canceled on this memorable Sunday of March 19, 2023. It had acted on the orders of the Financial Market Supervisory Authority (Finma), which itself had supported by a secret emergency order issued the same day by the Federal Council.

The capital that Credit Suisse has raised thanks to these “Additional Tier 1”, or “AT1”, bonds amounts to 16 billion francs. This amount was ultimately reduced to nothing with the stroke of a pen.

A “useless” rescue

Around 2,500 injured parties filed an appeal with the Federal Administrative Court in St. Gallen within 30 days of signing the takeover. More than a thousand of them have their interests represented by the international law firm Quinn Emanuel Urquart & Sullivan. The main person responsible for the complaints of victims of the CS is the Swiss lawyer Thomas Werlen.

The position of the plaintiffs is well known: they challenge the legality of the cancellation of the obligations by arguing that the necessary conditions, as stipulated in the AT1 bond issue prospectuses, were not met on March 19, 2023. The equity declared by Credit Suisse, confirmed by the authorities, had never fallen below the critical threshold triggering the contractual cancellation of the obligations. In addition, after the injection of 50 billion francs by the National Bank on March 15, 2023, Credit Suisse had sufficient liquidity.

The plaintiffs therefore request the annulment of the decision of March 19 taken by Finma. For its part, the Financial Markets Supervisory Authority stressed that the state support granted to CS had made the total cancellation of AT1 obligations necessary and made it possible to strengthen the bank’s own funds. The arguments of the disputing parties may seem like niceties to the uninitiated. After all, these days of March were marked by total chaos on the Swiss financial centerand no one will dispute that many frightened customers closed their accounts with CS to transfer their money to another bank in search of safety.

However, a crisis of confidence, as Finance Minister Karin Keller-Sutter rightly diagnosed, is not necessarily a “trigger event” (a contractually defined event, which triggers the application of the cancellation clause). .

The procedure before the Federal Administrative Court is currently pending. The response of Finma and UBS to the complaint has been submitted to the court and has been waiting for some time to be sent to the plaintiffs.

Acting in the “public interest”

In this context, Finma should defend the decision contested by the plaintiffs by putting forward the public interest. Indeed, at that time, the financial world and the finance ministers of many major countries were in full turmoil. A fall of Credit Suisse could have compromised the confidence of customers of other banks and triggered a new financial crisis, according to fears expressed.

Concerned calls were received at the Federal Palace from Washington, Paris, London, Berlin, and probably other finance ministries. A takeover by UBS, which would have put an end to the panic overnight, seemed to be the solution favored by everyone.

The plaintiffs, however, maintain that the takeover was not necessary given Credit Suisse’s capital and liquidity positions. If the Federal Administrative Court nevertheless concludes that Finma’s decision was necessary and legal, the creditors should be compensated for their state-ordered expropriation. This is what the subsidiary request in the complaint states.

Thomas Werlen and his firm also file an expropriation action in New York since June of this year. On Tuesday, it was revealed that major US asset manager Alliance Bernstein had joined the suit seeking $225 million in compensation. It is likely that this prominent name among the plaintiffs will now encourage other well-known actors to join the action.

The Southern District Court of New York, already well known in Switzerland due to various banking scandals over the past twenty years, will have to decide next year whether to accept a complaint against the Confederation. Under the Foreign Sovereign Immunities ActSwitzerland benefits in principle from immunity against private civil actions. Unless the country is participating in a purely commercial transaction that restricts the property rights of American citizens.

The firm Quinn Emanuel Urquhart & Sullivan maintains that Switzerland “in practice played the role of an investment bank” during the takeover of CS and organized the deal. Although this argument may seem audacious, Switzerland clearly takes it seriously, to the point of having itself commissioned a renowned law firm in New York.

A Manhattan court must decide

The situation could become delicate for Switzerland if the Manhattan court agreed to examine the case. In this case, judges could demand the delivery of documents that the federal government had classified as strictly confidential in a passage of the emergency order, referring in particular to the risks linked to “a multitude of liability claims amounting to billions.

The Swiss head of data protection, Adrian Lobsiger, recommended making part of these documents public after the publication of the report of the Parliamentary Commission of Inquiry. However, such a move seems unlikely. Perhaps the Parliamentary Commission’s report will offer insight into the secrets that have significant financial value for some investors.

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