NY Appeals Court Revives Credit Suisse Fraud Suit

By Nick Brown

Law360, New York (September 23, 2009) -- A New York appeals court has revived a group of investors' arbitration claim against financial services firm Credit Suisse Group AG, reversing a lower court's ruling that the investors filed the claim too late.

The investors, led by New York billionaire Ronald Lauder, filed suit in April 2007 alleging the company misrepresented the financial experience of some of its hedge fund managers, resulting in a loss of $11.4 million.

Credit Suisse petitioned a New York state court to dismiss the case as time-barred — which it did, ruling that the fraud came to light as early as 2003 and so investors had missed the two-year limitations period.

But in a decision passed down Sept. 22 in the New York Supreme Court's Appellate Division, a five-judge panel ruled that, while investors may have known generally of the company's mismanagement in 2003, they could not have known specifically of the managers' lack of experience — the factor that ultimately led to the claim — until late 2006.

The court reinstated the claim, which will now go back to arbitration.

The investors are limited partners in exchange fund DLJ Emerging Growth Partners LP, which lost about 90 percent of its value — roughly $240 million — from 2000, when the claimants joined, to 2002, according to the opinion.

Members of the fund received a private placement memorandum prior to joining that highlighted the risky nature of the fund, explaining that it contained “newly emerging, high-technology dot-com stocks” without much history, the decision said.

The memo assured potential investors that the hedging strategy would be overseen by 13 officers and directors with “extensive experience” and “significant expertise” in the field, according to the opinion.

But Hugh M. Neuburger, one of the fund's managers, testified as part of a separate fraud claim that he and at least one other manager had no experience hedging, the opinion says.

Neuburger's testimony, taken in November 2006, is what sparked the Lauder investors to file their claim, the group's attorney, Daniel Solin, said Wednesday.

In its state court petition Credit Suisse pointed to the prior investor fraud claims for which Neuburger testified, filed in 2003 and 2004, which claimed breach of fiduciary duty and breach of contract.

“Essentially, they were saying that we should have been on notice at that point that there was a problem, because these two prior fraud claims had been made,” Solin told Law360 Wednesday.

“But our position was, we might have known there was general mismanagement, but we didn't know until [Neuburger's] testimony that these managers had no experience in hedging,” he said.

The court held that the investors' loss of money alone would not have been enough to cause suspicion of fraud.

“The appellants were warned that the fund was particularly risky,” the decision said. “This alone should defeat the assumption that the loss in value would necessarily cause a person … to infer fraud.”

Solin said he is pleased with the court's decision.

“I'm glad this matter can go back to arbitration, though if I had my druthers, I would prefer it be handled through litigation,” he said.

An attorney for Credit Suisse declined to comment Wednesday.

The investors are represented in the case by Daniel Solin and Cohen Kinne Valicenti & Cook LLC.

Credit Suisse is represented by Manatt Phelps & Phillips LLP.

The case is CSAM Capital Inc. et al. v. Lauder et al., case number 601376/07, in the New York State Supreme Court, Appellate Division.