Partner Mark Kenkre discusses how Credit Suisse is now facing significant litigation from investors who have lost billions, after having made bold claims about the financial strength of Greensill capital, in Professional Wealth Management.
Mark’s article was published in Professional Wealth Management, 18 May 2021, and can be found here.
The Financial Conduct Authority (FCA) recently announced that it is formally investigating matters relating to the collapse of Greensill Capital UK. Greensill is a supply chain finance firm which was set up to assist businesses cashflow and avoid late payment fees. However, Greensill has now run out of cash itself, and its collapse is causing a wealth of controversy for its former backers.
It is understandable that former Prime Minister David Cameron’s controversial lobbying of the UK government on behalf of Greensill has dominated the headlines. However, it is the statements made by other backers of the failed business which may yet prove to be of greater importance to investors seeking to recoup their losses.
Credit Suisse, for example, made particularly bold claims as to the strength and financial viability of Greensill, which have turned out to be quite wide of the mark. Such statements may have resulted in billions of dollars in losses to investors and are set to prompt very significant litigation against Credit Suisse. Investors are now actively engaged in mounting a group action against Credit Suisse, to recoup losses currently estimated in the billions dollars. If Credit Suisse is found to have been reckless as to the representations it made to investors, that could prove to be a costly mistake for the organisation, which is facing parallel claims in the UK and the US.
It has been reported that, just a year ago, Credit Suisse told investors that the now collapsed finance firm was a “once in a generation” company that could be worth USD$30 billion and was set to enjoy “exponential growth” over the next three years. This erroneous analysis led to Credit Suisse building up positions in Greensill totalling over USD$10 billion. The bank has since recovered USD$5.4 billion, since a large portion of the funds were held in short-dated U.S. Treasury bonds. However, it is uncertain whether there will be any return for investors on the US$4.6 billion outstanding balance of the investment.
The statements made by Credit Suisse as to Greensill’s prospects are set to come under intense scrutiny, with many investors now claiming that if it were not for the representation made by the Bank, they would have not invested in the failed organisation. Given the understandable perception that Credit Suisse had enhanced market knowledge and access to expert analyses of business data and financial records, the representations made by Credit Suisse will rightly be judged at a higher threshold than those of organisations which were less closely connected to Greensill.
In a recent letter to parliament’s Treasury select committee, FCA chief executive Nikhil Rathi referred to the FCA investigation relating to the Greensil collapse and pointedly noted that, “We are also cooperating with counterparts in other UK enforcement and regulatory agencies, as well as authorities in a number of overseas jurisdictions”. Clearly the regulatory repercussions for those involved in the Greensill debacle will not be confined to the US and the UK. Reports that the Swiss regulator FINMA questioned Credit Suisse about its investments in Greensill just months before the bank posted a US $10 billion loss show the level of regulatory interest in the matter.
In 2020, Mr Cameron wrote a text message saying that he was “riding to the rescue … with my new friend Lex Greensill”. In other communications to the UK government, Mr Cameron called Treasury’s refusal to financially support Greensill “nuts” and “bonkers”. Mr Cameron was a senior adviser for Greensill, and owned a 1% stake in the company, which at one point was planning a market floatation with a £5bn valuation. The government is now investigating the propriety of Mr Cameron’s lobbying on behalf of Greensill.
While the involvement of a former Prime Minister has proven to be titillating to the public at large, investors’ hopes of reimbursement lie in court cases such as that recently launched against Credit Suisse in the US, which alleges that the bank “ignored numerous red flags in connection with the Greensill funds, such as suspicious shipment activities during an internal compliance check”.
The Greensill debacle has left Credit Suisse reeling and reputationally damaged, as it faces into a barrage of litigation and regulatory investigation across a number of jurisdictions.