New York Attorney General Eric Schneiderman has filed a lawsuit against Credit Suisse for allegedly deceiving MBS investors, the second case he has filed as part of a joint effort with the federal government.
Credit Suisse's misconduct and deceit was at least partially responsible for more than $11 billion in losses suffered by investors in its boom-era residential mortgage securitizations, New York's suit claims.
The bank "systematically misrepresented that it had a careful due diligence process," Schneiderman said on a media conference call. Banks officials "took loans they knew were bad, because they were so anxious to pool more mortgage back securities and make more money."
Some Credit Suisse employees resisted the efforts, Schneiderman said. But they lost.
"There was a battle going on inside credit Suisse," he said. "A group of Credit Suisse officers … were telling the traders and others that they had to put up with bad loans."
The alleged false claims are rooted in the prospectuses for Credit Suisse mortgage backed securities, which claimed that the bank had high standards and a "disciplined origination and purchase strategy," according to investor marketing documents cited in the case.
The Attorney General's office alleges that, internally, the bank was aware its standards were far lower. Among the dcuments cited in the New York complaint is an email in a Credit Suisse employee wrote that the bank's "incentives" program encouraged originators "to continue delivering… crap."
Although the company's head of due diligence wrote in an internal 2007 email that Credit Suisse's mortgage quality control suffered from "systemic problems," the company did nothing to halt its production of new securitizations, the suit claims. Nor did it repurchase loans written by its own subprime unit, Lime Financial Services, as it was contractually obligated to do, the complaint says. The bank even securitized loans that its own due diligence consultant, Clayton underwriting due diligence consultant, Clayton Holdings, had identified as ineligible for repurchase, according to due diligence staff interviewed by the Attorney General's office.
"We firmly reject this complaint which recycles baseless claims from private lawsuits and uses an inaccurate and exaggerated number," a representative of the bank said in a prepared statement. "We look forward to presenting our defense in court."
New York's case is being brought under the Martin Act, a state law which gives the attorney general broad authority to pursue misconduct in the securities markets.