Mortgage securities cases

Monday, December 24, 2007 - 12:32 PM EST
Ruling leaves Credit Suisse on the hook in National Century lawsuits

A federal judge is allowing institutional investors in the defunct National Century Financial Enterprises to pursue about $2 billion worth of claims against Credit Suisse First Boston, which issued the company's "AAA"-rated notes.

U.S. District Judge James Graham in Columbus refused to dismiss most claims against the investment bank, saying the plaintiffs had clearly outlined allegations that the company made millions by marketing and selling notes it knew were worthless. He said a jury must decide that question.

National Century, of Columbus, went under in 2002, resulting in about $2.6 billion in investment losses. The company bought lump sums of unpaid bills from health-care companies and sold the receivables as securities to be backed by the collections.

However, the civil claims and a separate criminal case against the company's founders argue that executives were taking money for personal use by investing in receivables that were uncollectible or even nonexistent.

Several civil cases were consolidated before Graham, including lawsuits by the state of Arizona and several of its state entities, Metropolitan Life Insurance Co., Lloyds TSB Bank PLC and New York City pension funds. Not all of the plaintiffs sued Credit Suisse alongside National Century, so the claims affected by Graham's Dec. 19 ruling don't equal all the investment losses.

Credit Suisse, which bought about $3 billion in notes from National Century and sold them to institutional investors on the secondary market, had argued it wasn't liable because it did not make misrepresentations to clients, had no knowledge of the underlying fraud at National Century and was protected by disclaimers in the marketing materials.

But Graham said the complaints alleged that Credit Suisse received audit reports, letters and internal memos that indicated it knew of the fraud as early as 1998.

"The Court finds that the complaints put Credit Suisse at the center of the alleged scheme," he wrote.

Graham also rejected the disclaimer argument out of hand.

"As Plaintiffs argue, it would defeat the securities laws if parties could escape liability for their own deliberate misrepresentations by inserting boilerplate disclaimers into offering materials," he wrote.

Neither Credit Suisse officials nor their attorneys were immediately available for comment.

Kathy Patrick, Houston-based lead counsel for several of the major investors including the state of Arizona and several of its state entities, said the clients look forward to taking the case to a jury and were pleased the judge didn't let Credit Suisse off the hook on a technicality.

"Credit Suisse's position in this case was quite startling to our clients," she said Monday. "They were entitled to rely on the truthfulness of the statements they received."

The ruling will be important precedent for future lawsuits in mortgage securities cases, she said.
"Investment banks routinely try to avoid liability after the fact by invoking these disclaimers," Patrick said.