How UBS’s $3.3bn Credit Suisse deal spawned $9bn of legal claims

Switzerland’s government managed to head off a spiralling European banking crisis when it orchestrated UBS’s $3.3bn takeover of Credit Suisse six months ago — but the long-term pain has only just begun, with $9bn of legal claims already filed and more cases in the works.

Debt investors lost out when $17bn of Credit Suisse debt was written down to zero during its hastily negotiated rescue, while shareholders received roughly a tenth of what their equity would have been worth three years ago.

Potential claimants have three targets: Finma, the Swiss regulator that ordered the writing down of Credit Suisse’s $17bn of ‘additional tier 1 bonds’; the Swiss government, which engineered the rescue deal and introduced an emergency law to make it possible; and UBS itself.


The Swiss regulator has been the main target so far.

The disputes mainly relate to AT1s, a form of bank debt that can be converted to equity or wiped out when lenders run into trouble. Holders of Credit Suisse’s AT1s claim the trigger that would have allowed the bonds to be written down — a so-called viability event — did not happen and so Finma acted rashly in wiping them out.

By forcing losses on AT1 investors while allowing equity investors to receive some value for their shares, Finma upended the traditional capital hierarchy: a move from which the European Central Bank and Bank of England were quick to distance themselves.

But Finma, which is finding a replacement chief executive after Urban Angehrn quit because of stress last month, has consistently argued that the AT1s were designed to protect taxpayers from bearing alone the cost of failed banks. It has insisted that, without the AT1s being written down, UBS would have been unwilling to buy Credit Suisse. With no alternative buyer in the frame, nationalisation would have been the only alternative.

International law firm Quinn Emanuel Urquhart & Sullivan has already filed complaints in the Swiss court in St Gallen on behalf of 1,000 investors with more than $6bn of AT1 holdings. A similar case brought by London-headquartered firm Pallas has close to 800 claimants who collectively own $2.5bn of Credit Suisse AT1s.

Firms including Withers and Drew & Napier in Singapore have also initiated claims, since AT1s were particularly popular among wealthy Asian investors because of their higher interest rates compared with other bonds and perceived safety compared with shares. Between them, the two Singaporean firms represent in total around 300 claimants and $250mn of AT1s. Further cases both in international and domestic courts are in the works.

Finma is also the target of another group who lost hundreds of millions of dollars on the takeover: current and former staff at Credit Suisse who received a form of bonus that was similar to AT1s.

The contingent capital awards date back to 2014 when staff at managing director and director level were offered them as part of their remuneration.

However, $400mn of CCAs were wiped out when Finma cancelled the AT1s in March. Law firms in Switzerland working on behalf of current and former Credit Suisse staff have filed legal claims in St Gallen against the regulator.


Several law firms have begun putting together arbitration claims against the nation of Switzerland through the International Centre for Settlement of Investment Disputes in Washington DC.

These are based on investment treaties that Switzerland has with more than 120 countries around the world which were designed to protect investors from the risk of governments expropriating assets through nationalisation.

“Traditionally, investment treaties were the shields western investors took into less developed markets, guarding against unfair treatment by host governments”, said Kher Sheng Lee, Asia Pacific co-head of the Alternative Investment Management Association, which this month organised an event for AT1 holders in the region.

“Now, we’re seeing a fascinating role reversal, where investors from these ‘emerging’ markets are using them to challenge Switzerland, which was supposed to be a bastion of financial stability.”

Drew & Napier is pursuing one such case, while Allen & Overy is soliciting claimants for a separate case funded by litigation finance group Omni Bridgeway.

Another firm, Quinn Emanuel, is exploring an alternative approach: suing Switzerland through the US courts. Sovereign nations are usually immune to being sued in the US. But the firm believes they can convince a judge that investors should be able to sue Switzerland in this case.

Investors in another case brought by Quinn Emanuel involving YPF, the Argentine oil major, recently won an award of $16bn through the New York courts after a judge ruled that the South American country had unlawfully renationalised the company.

That was one of the largest judgments against a foreign sovereign by the US courts, and could serve as a useful precedent for Credit Suisse shareholders who argue that, by passing a law to engineer the cut-price sale of the bank to UBS, the Swiss government in effect expropriated their assets.

Quinn Emanuel could file a claim against Switzerland by the end of this year.


The third target that investors are pursuing is the biggest beneficiary of the takeover: UBS.

UK firm Pallas is close to initiating proceedings against the bank in Switzerland for Credit Suisse’s role in writing down the AT1 bonds, even though it was directed to do so by the government and Finma so the takeover could go ahead.

“The reasonable reaction for Credit Suisse — now UBS — would have been to challenge a direction to write down the AT1s,” said Fiona Huntriss, a partner at Pallas. “It’s not good enough to say ‘I was told to do this by my regulator’.”

And at least two claims have been brought by groups of Credit Suisse equity investors to Zurich’s commercial court, arguing that shareholders should be compensated by UBS for the bargain-basement deal it negotiated.

Under Swiss law, shareholders in a company that is taken over who feel short-changed can appeal to a judge to be paid “adequate” compensation. In this case, lawyers are arguing that UBS should pay any compensation that is decided.

The Swiss lender unveiled a $29bn quarterly profit last month — the record for a bank — which was almost entirely down to an accounting gain it made on the Credit Suisse deal.

“If you look at the special profits, it’s an indicator that the price UBS paid for Credit Suisse was way too low,” said Arik Röschke, general secretary of the Swiss Investor Protection Association (SASV), which filed a claim in Zurich’s commercial court on behalf of 1,500 Credit Suisse shareholders in August.

Another lawsuit organised by Lausanne start-up LegalPass has attracted 3,000 claimants. Both the SASV and LegalPass declined to reveal the size of their claims.

UBS has argued that the $29bn accounting gain should not be viewed as a traditional profit because it will mostly be used to back Credit Suisse assets and bolster the combined bank’s capital strength.

Still, the $3.3bn that UBS paid for Credit Suisse was less than half the bank’s market value on the final trading day before the deal was sealed and a fraction of its book value.

The prospect of legal challenges dragging on for years threatens to prove a distraction for executives trying to make a success of the most significant bank merger since the global financial crisis.

“They have to decide whether it is better to have a painful ending or endless pain,” said the SASV’s Röschke. 

Finma, UBS and the Swiss government declined to comment. 

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