The UK Commercial Court (Royal Courts of Justice) has ruled in favour of the claimants in their action for damages against Credit Suisse in relation to a US$31m investment mis-selling claim (Abdullah and others v Credit Suisse (UK) Limited and Credit Suisse Securities (Europe) Limited), brought by a Kuwaiti family whose leveraged structured note portfolio was closed out in late October 2008.
The claimants are a wealthy Kuwaiti family, who entered into various structured capital-at-risk products with Credit Suisse at the recommendation of the bank's relationship manager. According to the court ruling, in May 2008, they purchased their 18th such product from Credit Suisse, namely a US$20m equity-linked note. In October 2008, following the global economic crisis, in-built barriers on some of the notes were breached, rendering their capital at risk.
The bank arranged for most of the family's existing portfolio to be switched into a consolidated note, stating that this switch would not require additional funds. However, immediately upon that settling, the bank demanded additional funds to shore up the substantial leverage on the portfolio. The claimants decided not to meet the bank's 'margin call', and allowed their account to be liquidated. From the approximately $30 million they had put into their account, they were left with an overdraft of US$300k.
The claimants alleged that Credit Suisse had acted in breach of the FCA's Conduct of Business (COBS) rules, in that Credit Suisse did not take reasonable steps to ensure that any personal recommendation was suitable for the client; did not have a reasonable basis for believing that the transaction recommended met the client's investment objectives nor that the client had the necessary experience and knowledge to understand the risks involved; and did not ensure that a communication or financial promotion was fair, clear and not misleading.
The court decision found Credit Suisse to have breached all three COBS rules as it gave a personal recommendation to the claimants to buy Note 18 (a US$20m, three-year equity barrier SCARP, callable quarterly at par, paying coupon quarterly at the rate of 12% p.a., with the barrier set at 60% of strike levels. The note was referenced the Eurostoxx 50, S&P 500 and Nikkei 225 indices plus the Swiss Market Index) and the question of suitability boiled down to whether the agent of Credit Suisse "had a reasonable basis for his advice that there would only be a small chance of the barriers under Note 18 being hit so as to result in a loss of capital". The court concluded that a low risk of a loss of capital was not a reasonable view to hold and Note 18 was not suitable for the Claimants' investment objectives.
However, the court found that Credit Suisse was not in breach of any of the COBS Rules in respect of two other notes (Note 19 and Note 20). According to the ruling, Credit Suisse had not made any misleading communications as to Note 19 being a safe investment, as alleged; whilst although Note 20 was high risk and investing following the collapse of the Lehman Brothers was clearly risky, the court decided that it was suitable for Credit Suisse to have believed that Note 20 met the Claimants' objectives at that time.
The judge rejected Credit Suisse's arguments that the chain of causation was broken by the claimants' decision not to meet the margin call in October 2008 and/or that there was contributory negligence by the Claimants. The Judge also rejected Credit Suisse's argument that the loss, being caused by the severity of the 2008 market crash, was too remote.
In addition, the "financial suicide" defence being run by Credit Suisse was defeated and the claimants were not found to have been contributorily negligent. According to the ruling, claimants are entitled to damages reflecting the position they would have been in had they not purchased the note in May 2008 (and so had pursued a different restructuring in October 2008).
The damages awarded to the claimants are to be assessed by the court at a later hearing if not agreed between the parties.
Click in the link to read the full judgment.
Related stories:
Regulation T claims Vix-linked tracker victim
US investment firm sues exchange in trade secrets structured notes case
Credit Suisse sued by retired stockbroker over US$26m investment losses in 2008
La Banque Postale and Natixis fined for structured products shortcomings