September 23, 2021

Credit Suisse ruling helps preserve Martin Act’s reach

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Credit-SuisseBy Scott Flaherty, From The Litigation Daily

In refusing to toss a multibillion-dollar fraud lawsuit against Credit Suisse AG last week, New York Supreme Court Judge Marcy Friedman didn’t just disappoint the bank and its lawyers at Cravath, Swaine & Moore. The judge also poured coal in the stockings of other defendants looking for vulnerabilities in New York’s 93-year-old Martin Act, the state’s fearsome tool for combating financial fraud.

In her Dec. 24 decision, Friedman allowed New York Attorney General Eric Schneiderman to press forward with claims that Credit Suisse knew about flaws in loans packaged into residential mortgage-backed securities (RMBS) and misrepresented the quality of those loans, causing about $11.2 billion in investor losses. Friedman shot down the Swiss bank’s argument that suit was brought too late, handing the state a win that could make it harder for others on Wall Street to dodge state-launched investor fraud cases in New York.

Schneiderman’s office sued Credit Suisse in November 2012 under the Martin Act, a powerful anti-fraud statute passed in 1921 that allows New York’s attorney general to pursue securities actions without meeting the pleading requirements of federal securities cases.

Credit Suisse’s lawyers, led by Cravath’s Richard Clary, argued in their motion to dismiss that Schneiderman waited far too long to bring the suit, which concerned securities packaged and sold in 2006 and 2007. Common law fraud claims typically carry a six-year limitations period in New York. But because the AG sought to hold the bank liable under the Martin Act, the bank maintained that a three-year statute of limitations should apply.

According to Clary and his team, Credit Suisse wouldn’t face liability in the AG’s case “but for” the Martin Act. And, the bank asserted, the AG’s claims were “substantively different” from common law fraud claims, since the Martin Act didn’t require the AG to plead two key elements of a common law fraud claim—namely, that Credit Suisse had knowledge of the alleged fraud and that investors relied on its alleged misrepresentations.

Friedman disagreed, ruling that the suit’s Martin Act claims concerned allegations that could also be brought in a common law fraud case.

“This court finds that the essence of plaintiff’s claims under. . . the Martin Act is that defendant made false representations in order to induce investors to purchase their securities,” Friedman wrote. “These claims thus seek to impose liability on defendants based on the classic, longstanding common-law tort of investor fraud.”

Friedman also refused to dismiss claims that Credit Suisse sometimes found defective loans underlying its securities and obtained payouts from the loans’ originators, but didn’t pass any of that settlement money on to investors. The bank argued, unsuccessfully, that those “bulk settlement” claims were barred because the bank previously reached a deal with the U.S. Securities and Exchange Commission over similar transactions.

Credit Suisse had also argued that the state failed to provide sufficiently specific allegations to back its RMBS fraud claims. But the judge ruled that the state met its burden by alleging a “systematic abandonment” of the bank’s underwriting guidelines.

Credit Suisse has vowed to appeal, so New York’s First Judicial Department may soon have a chance to weigh the bank’s arguments. But if Friedman’s decision is ultimately upheld, it closes off a potential escape hatch for Martin Act defendants accused of years-old misconduct.

Some of the country’s most prominent financial institutions, including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp., have already settled RMBS-related claims with state and federal regulators, including with Schneiderman’s office. But the New York AG has indicated that his office is also looking into other banks that sold and promoted RMBS in the run up to the financial crisis.

Schneiderman’s office said in a statement that it looks forward to continuing the case against Credit Suisse and “pursuing accountability for those who contributed to the near collapse of our economy.”

Cravath’s Clary didn’t immediately respond to a request for comment on Monday. The bank said in a statement that it would continue to fight the case.

Photo: Rick Kopstein/ALM

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