The Swiss bank has defeated three lawsuits over products linked to the CBOE Volatility Index the US market following the volatility swings of early 2018 which hit short/inverse Vix investors.
Credit Suisse Group has been cleared of claims suggesting it had misled investors in its VelocityShares Daily Inverse VIX Short-Term exchange-traded notes (ETNs) following a volatility swing that caused the notes losing 96% of their value in a single day.
US district judge Analisa Torres dismissed three lawsuits on Wednesday last week (September 25) as the Swiss bank proved it had warned investors about risks while investors could not show that they were misled or that Credit Suisse had intended to defraud them.
The Manhattan judge ratified the Report and Recommendation by another US Magistrate - Sarah Netburn, on August 16 2019, which instructed the lawsuits to be dismissed.
The events that ultimately led to the litigation occurred on February 5 2018, when the S&P500 index dropped 4.1% from $108.37 to $72.59, ‘and a surprise increase in market turbulence punished investors betting on low volatility’.
According to the ruling, the plunge exacerbated by Credit Suisse’s huge purchase of futures contracts - roughly a quarter of the entire VIX futures market - to benefit from the higher volatility attracted investors who during that ‘Flatline Period’ bought US$700m worth of XIV notes ‘at a price that far exceeded their real value’.
The next day, Credit Suisse redeemed the notes at US$5.99 per note which according to the ruling made the bank between US$475m and US$542m in profit by redeeming the notes at that price.
The judge considered ‘meritless’ the claim from investors that Credit Suisse ‘misrepresented or concealed’ the effect on the VIX Futures Index of previous liquidity spikes or its own hedging during the market swings.
‘[Credit Suisse] had simply taken advantage of the high price of XIV notes in January 2018 by selling them in large quantities, and then taken advantage of the market crash in February 2018 by exercising its right to accelerate the notes and force redemption at a very low price, without intending the former action to cause the latter,’ read the ruling.
Aggressive but legitimate
Claims that judge Netburn overlooked alleged false statements by Credit Suisse chief executive Tidjane Thiam (pictured), which show that they were trying to cover up a fraudulent scheme and that the bank breached its own risk limits, were also dismissed.
Judge Torres backed the argument of Judge Netburn and overruled the market manipulation claims. ‘Notwithstanding the size of the January sale, the innocent explanation for the large volume of XIV notes sales in January 2018 was more plausible than the interference that Credit Suisse engaged in those sales in order to later cause a liquidity crash,’ stated Torres.
The claimants also pointed to Thiam’s statement that the decision to accelerate the notes ‘was actually to protect investors. Because the product stopped trading, it was quasi-impossible to price’. ‘[However,] the more plausible inference from that statement is that Thiam was simply seeking to put a positive face on an aggressive (but legitimate) business decision,’ stated the ruling.
The Swiss bank remains involved in a number of regulatory and legal proceedings beyond the ETN-related litigation including US dollar ICE Libor, Sibor/Sor and other OTC trading cases. According to the second quarter results, the bank estimated that the aggregate range of loss not covered by existing litigation provisions could go as high as US$1.4 billion.
Nevertheless, the bank’s net revenues increased 4% compared to Q12019, primarily reflecting higher net revenues in investment banking & capital markets, and global markets. The increase in investment banking & capital markets was driven by higher revenues across all businesses. The increase in global markets reflected higher underwriting activity due to improved market conditions, partially offset by lower equity trading activity.
The case was heard in the US District Court, Southern District of New York. Click in the link to read the court decision. A Credit Suisse spokesperson said the bank is pleased with the outcome of the case.