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UBS INHERITS LEGACY OF LEGAL HEADACHES IN CREDIT SUISSE TAKEOVER


Legal issues are among the key unknowns as UBS and Credit Suisse, Switzerland’s
two biggest banks, merge. PHOTO: AFP
Updated
May 3, 2023, 6:46 PM SGT
Published
May 3, 2023, 1:20 PM SGT
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GENEVA – When UBS integrates Credit Suisse in the coming months, the Swiss bank
plans to run staff from the scandal-prone former rival through what UBS chairman
Colm Kelleher dubbed a “culture filter” to weed out potential bad apples.

The inconvenient truth for UBS is that the vetting will not do anything for the
legal headaches already working their way through courts in Switzerland and
abroad, and the clean-up will fall to UBS chief legal counsel Barbara Levi once
the deal closes – expected by June. 

The long list of unresolved cases spans an embarrassing criminal conviction for
facilitating a Bulgarian cocaine trafficker’s money laundering to a
half-a-billion dollar settlement in a bribery scandal related to a tuna fishing
fleet in Mozambique. 



All told, the civil liabilities could reach into the billions, and then there
are the criminal risks as well. The deal itself has also raised new issues as
owners of at least US$6 billion (S$8 billion) of bonds fight against getting
wiped out.  

While the price UBS is paying is low enough to allow the bank to absorb
unexpected exposure, legal issues are among the key unknowns as Switzerland’s
two biggest banks merge. Spokesmen for both companies declined to comment on the
status of key cases or how they will evolve once the deal closes. 

The litany of Credit Suisse issues comes as UBS winds down its own backlog,
including an expected agreement with the United States authorities over
residential mortgage-backed securities that date from the 2008 financial crisis.
In France, UBS has lodged a top court appeal following a €1.8 billion (S$2.65
billion) criminal conviction in a tax case in 2021.




Here is where things stand in some key cases: 

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‘TUNA’ BRIBES

Starting in London in September, UBS’ legal team could face a 13-week civil
trial over Credit Suisse’s role in the US$2 billion “tuna bond” scandal. To
resolve a US Justice Department criminal probe over a fundraising scandal that
saw hundreds of millions looted from Mozambique, the bank agreed in 2021 to pay
almost US$475 million.

The loans were for three maritime projects including a tuna fishing fleet and a
surveillance operation to protect Mozambique’s coastline against pirates. Three
former Credit Suisse bankers were convicted in the US for accepting bribes. 

The authorities in Mozambique accuse Credit Suisse of ignoring multiple red
flags when arranging the loans to state-backed companies. The Swiss lender
denies those claims. In this case too, there is the possibility UBS chooses to
settle to avoid the embarrassment of a lengthy London trial.




US ENTANGLEMENTS

In late March – just days after the forced sale to UBS – the US Senate’s finance
committee said it had uncovered “major violations” of Credit Suisse’s US$2.6
billion plea deal over helping Americans cheat on taxes. Mr Ron Wyden, the
Oregon Democrat who chairs the committee, said its investigation shows the bank
did not live up to the 2014 deal and that the pending takeover “does not wipe
the slate clean”.

Credit Suisse has said it does not tolerate tax evasion and is “actively
cooperating” with the Justice Department. It is not clear what penalties could
result from the allegations. 

The Swiss lender also suffered a legal setback in March. A New Jersey court
rejected its bid to defeat class-action status in a US$1.8 billion lawsuit from
investors in its VelocityShares Daily Inverse VIX Short Term exchange-traded
notes. The potential cost of losing at trial makes a settlement likely and in
the range of US$500 million, according to Mr Elliott Stein, Bloomberg
Intelligence’s senior litigation analyst.

In another US issue, Credit Suisse faces private civil litigation that concerns
some US$2 billion in claims related to its role in selling residential
mortgage-backed securities, which contributed to the 2008 financial crisis.
Recent court decisions point to a potential settlement in the range of US$400
million to US$800 million, according to Mr Stein.

More On This Topic
UBS Q1 profit halves as cost of old toxic debt mounts
Credit Suisse saw $7.5 billion fund outflows since takeover by UBS


RUSSIAN SANCTIONS PROBE

UBS and Credit Suisse are connected on at least one issue. On March 23 – just
four days after the shotgun wedding was announced – it emerged that both were
among those subpoenaed by the Justice Department in a probe into whether
financial professionals helped Russian oligarchs evade sanctions. 

The US inquiries are focused on identifying staff that dealt with sanctioned
clients and how those clients were vetted over the past several years. Before
fresh sanctions were imposed following President Vladimir Putin’s invasion of
Ukraine, Credit Suisse was a magnet for wealthy Russians. At its peak, the bank
managed more than US$60 billion for clients from the country and was still
managing about US$33 billion as recently as May 2022. 


BOND BACKLASH

In addition to legacy legal issues, the combination has raised new ones. Some
disgruntled owners of US$17 billion in Credit Suisse bonds that were wiped out
in the hastily arranged deal are gearing up for a fight. Switzerland’s Federal
Administrative Court confirmed it has received four lawsuits representing at
least US$6 billion in Additional Tier 1 debt, while hundreds have sued
Switzerland’s banking regulator Finma.

This might be merely a nuisance for UBS, because the risk was clearly stated in
the offering. Also, any litigation has to be brought under Swiss law, cutting
off the potential for New York firms to sue in the US financial capital.  

“These lawsuits likely face low odds,” said Mr Stein. “My reading of the bond
documentation is that it would be very hard for bondholders to succeed on the
merits.”

BLOOMBERG

More On This Topic
UBS CEO tells Credit Suisse staff to stay focused on clients and the business
UBS seeks to assure investors shotgun Credit Suisse takeover can pay off
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MCI (P) 076/10/2022, MCI (P) 077/10/2022. Published by SPH Media Limited, Co.
Regn. No. 202120748H. Copyright © 2023 SPH Media Limited. All rights reserved.

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