Switzerland is playing defence in the wake of the acquisition of Credit Suisse by UBS. While other central banks have reassured investors that AT1 bond holders will be given priority over bank shareholders, the Swiss authorities now find themselves in a position where they will have to argue in favour of some fairly topsy-turvy logic in terms of the way the UBS/Credit Suisse deal went down last weekend.
The Armchair Trader has sat in on a number of calls with top tier legal teams in New York and London and below are some of the main considerations and legal avenues for investors who have seen their AT1 holdings written down. If you are a holder of Credit Suisse AT1 debt it is important that you should contact one of the main teams currently preparing cases, as the window of opportunity is a small one.
Lack of consultation with shareholders
A few critical areas are being focused on: there was a lack of consultation with shareholders and it is not clear when FINMA, the Swiss regulator, ordered the write down of the Credit Suisse assets. The argument is now being made by FINMA that this was the contingency event required by the Credit Suisse AT1 bond prospectus, but lawyers have been quick to point out that the required legislation that FINMA needed did not exist on the statute books prior to 19 March and indeed seems to have been added as a clause last weekend.
While the Swiss government has adopted this approach, questions have already been raised in the Swiss parliament about changes made to Article 28 of the Swiss Financial Budget Act (2005). A quarter of the parliament have already petitioned for an emergency assembly to debate the actions of the government in this respect.
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Lack of transparency and mis-selling
Another question is whether Credit Suisse was prevented from disclosing proceedings to investors ahead of 19 March. This raises mis-selling issues, as bonds could have been sold by the bank while it knew already that it was being pushed into a merger with UBS. Information on the deal was already leaking out into the market in London from Credit Suisse in the UK by 15-16 March so must have been general knowledge with CS senior management a few days earlier.
One upside for investors is that there is scope for a Swiss court to challenge the constitutionality of the measures. This needs to occur within 30 days but expect lawyers to push for this soon.
Litigators may also want to look at whether Switzerland has violated its international treaties, especially Bilateral Investment Treaties (BITs). Even if you as an investor are not located in a jurisdiction with a BIT with Switzerland, if you are using an investment vehicle that IS located in such a jurisdiction, again there may be scope to get in on a breach of treaty case.
Government appropriation?
Lawyers will be asking whether the forced merger could qualify as government appropriation and whether this violates issues of fair and equitable treatment of investors as laid down in treaty. It does seem to have violated the letter of procedural fairness and transparency as prescribed in BITs.
Finally another interesting angle emerges in US courts where some investors may choose to sue under 10b-5 of the Federal Securities Law. State laws, including Californian blue sky laws, are also worth considering.
Ultimately Switzerland is looking fairly isolated as other central banks and regulators have moved to protect the functioning of the AT1 bond market.
Where to next?
Investors with Credit Suisse AT1 exposure should contact one of the main litigation teams currently being formed as the expectation is that any action will be taking place sooner rather than later. Switzerland has not formally passed the required legislation but the statutory limitation period is only 30 days.
As expected, FINMA is currently defending its position under the terms of the ‘viability event’ mentioned in the AT1 bond prospectus – i.e. that the bonds could be written down to zero when the bank was on the verge of collapse. Lawyers will likely focus on whether this was indeed a viability event, and secondly whether FINMA had the legal powers to act as it did. More to come when we have it.
