Credit Suisse Must Face ARS Lawsuit Over Subsidiary Brokerage’s Alleged Misconduct, Says District Court

The U.S. District Court for the Southern District of New York has rejected Credit Suisse Group’s (CS) motion to dismiss Elbit Systems Ltd. v. Credit Suisse Group, the auction-rate securities lawsuit filed by an investor claiming that alleged misconduct took place at a Credit Suisse Group brokerage firm subsidiary Credit Suisse Securities (USA) LLC. The court said that the investor did an adequate job of alleging that the subsidiary acted with actual power of authority as Credit Suisse Group’s agent.

The plaintiff, Elbit Systems Ltd., contends that it invested in ARS because it was told that these were liquid, safe, and backed by the US government-backed. However, the Israeli electronics company claims that even as the market started failing in 2007, cash managers started to replace the government-backed ARS with more risky ARS backed by credit-linked note securities and collateralized debt obligations, and its Corporate Cash Management account began to fail, it was never informed that these problems were happening. Instead, its holdings in these risky investments were allegedly increased.

As of the complaints filing, Elbit’s securities have not been sold while its ARS investments had allegedly lost about $16 million. Also, a Credit Suisse Securities executive is accused of telling the plaintiff that brokers Eric Butler and Julian Tzolov were too busy to handle its account when actually, the two of them were no longer at the firm because they had been accused of securities fraud.

Elbeit is alleging 1934 Securities Exchange Act violations. The plaintiff claims that Credit Suisse Group is liable for Credit Suisse Securities’ alleged financial fraud because the latter acted as the former’s agent and the former is the latter’s controlling person under the Act’s Section 20(a).

The court denied Credit Suisse Group’s motion to dismiss, initially refusing to apply Fed.R.Civ.P. 9(b) fraud pleading requirements, and noted that although fraud has to be pleaded with particularity the alleged agency relationship between Credit Suisse Securities and Credit Suisse Group is not itself alleged as having been the fraud.

The district court found that Elbeit did an adequate job of alleging that Credit Suisse Securities had actual authority to act for Credit Suisse Group. The court also pointed out Credit Suisse Group wholly owns Credit Suisse Securities and the former considers itself to have ‘local offices’ rather than ‘separate companies.’ Also, both companies share some of the same officers.

Unfortunately, many institutional investors sustained financial losses because they were advised to invest in auction-rate securities that were supposedly low risk, safe, and liquid. When the ARS marketed failed, many investors found that their funds, like the securities had been frozen. If you believe that misrepresentations convinced you to make a bad investment, contact our ARS securities law firm today.

Credit Suisse Loses Bid to Dismiss Elbit’s $16 Million Suit, Bloomberg, January 7, 2013

Elbit Systems Ltd. v. Credit Suisse Group

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Credit Suisse Securities Ordered by FINRA Panel to Pay $406 Million for Improper ARS Sale to Semiconductor Manufacturer STMicroelectronics NV, Stockbroker Fraud Blog, February 25, 2009

Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs, Stockbroker Fraud Blog, May 3, 2012

Barclays LIBOR Manipulation Scam Places Citigroup, Credit Suisse, Deutsche Bank, JP Morgan Chase, and UBS Under The Investigation Microscope, Institutional Investor Securities Blog, July 16, 2012

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