Roche Sues Credit Suisse Over $545M ARS

By Christine Caulfield

Law360, New York (October 20, 2009) -- Roche International Ltd. has hit Credit Suisse Group AG with a lawsuit in the U.S. alleging the bank's brokers fraudulently invested more than $545 million of the Swiss drugmaker's funds into risky auction rate securities.

The suit, filed Oct. 13 in the U.S. District Court for the Southern District of New York, is seeking over $270 million Roche claims was lost as a result of a scam by Credit Suisse's U.S. broker-dealer subsidiary — Credit Suisse Securities (USA) LLC — to collect lucrative commission fees by slyly purchasing ARS.

Roche alleges that the directors of Credit Suisse's corporate cash management group, Julian Tzolov and Eric Butler, defrauded the company and other foreign corporate customers by pumping their account funds into ARS while purporting to have invested the money in highly liquid student loan securities backed by government guarantees.

The pharmaceutical company says Credit Suisse invested over $545 million of Roche's funds into ARS between November 2006 and July 2007, “contrary to its representations and Roche's specific authorization and instructions.”

According to the complaint, Credit Suisse admitted in August 2007 that it had used Roche's funds to buy ARS and agreed to buy back two of the securities for $35 million but left Roche holding over $270 million in the doomed bonds “that it did not want and has been unable to sell.”

A representative for Credit Suisse did not immediately respond to requests for a comment Tuesday.

The action follows numerous other suits by Credit Suisse's corporate clients, including semiconductor maker STMicroelectronics NV, which sued in August 2008. In February, a U.S. arbitrator ordered the bank to pay the Swiss company $406 million it claimed to have lost.

In August Butler was found guilty by a jury in the U.S. District Court for the Eastern District of New York on numerous criminal counts of conspiracy and securities fraud.

His co-defendant, Tzolov, pled guilty on July 22 to numerous charges of conspiracy, securities fraud, bail-jumping, visa fraud and wire fraud. The former broker surrendered to authorities in Spain early in July after more than a month on the lam.

Prosecutors alleged the pair used customers' investment funds to purchase mortgage-backed ARS, which paid high commissions to brokers, and concealed from their clients where the funds were invested by, among other strategies, falsifying the names of the purchased securities.

The scheme was uncovered when the $330 billion ARS market went bust in February last year, by which time Credit Suisse's customers had suffered total losses of almost $1 billion, prosecutors said.

ARS are bonds and preferred stocks with interest rates or dividends that are reset periodically through an auction.

The ARS market collapsed amid growing panic over the widening subprime mortgage crisis. Without enough bidders willing to participate in periodic auctions, many who bought the securities could not sell them.

On July 6, both Credit Suisse and Merrill Lynch & Co. reached settlements with New York Attorney General Andrew Cuomo resolving a multistate investigation of the ARS market.

The two brokerage firms agreed to pay a combined $140 million in civil penalties, including nearly $25 million to the state of New York, and to buy back the securities from certain buyers.

Other broker-dealers to settle with regulators over ARS include Citigroup Inc., Morgan Stanley & Co., UBS AG and Wachovia Corp.

Roche is represented in this matter by Gibbons PC.

Counsel for Credit Suisse was not immediately available.

The case is Roche International Ltd. v. Credit Suisse Group AG, case number 09-cv-8674, in the U.S. District Court for the Southern District of New York.