Banking and Finance Law Daily Wrap Up, SECURITIES AND DERIVATIVES—Credit Suisse 'destroy documents' instruction, potentially connected with Russian sanctions, attracts Congressional attention, (Mar 29, 2022)

By Justin Marcus Smith, J.D.

Democratic lawmakers have launched an inquiry into whether Credit Suisse is complying with the international economic sanctions against Russia.

Representatives Carolyn B. Maloney (D-NY) and Stephen F. Lynch (D-Mass) have sent a carefully footnoted letter to Credit Suisse CEO Thomas Gottstein requesting that Credit Suisse respond to press reports that the company instructed investors to destroy evidence related to an alleged $2 billion portfolio of loans.

The bank is widely thought to have spun off its risk in connection with the portfolio in 2021 as part of what a separate Oversight Committee press release characterized as an “$80 million synthetic securitization deal.” Specific loans, either backed by the personal assets of Russian oligarchs Oleg Deripaska and Arkady and Boris Rotenberg or otherwise connected with such people, may have been placed in a pool with other, presumably unrelated loans. This would have been done to convert the flow of loan servicing repayments into securities, which Credit Suisse could then offer to investors.

The controversy fully erupted after the Financial Times and Fortune published stories on March 2, 2022, alleging that Credit Suisse sent a letter to hedge fund managers and other investors instructing them to “destroy and permanently erase” confidential information that Credit Suisse may have disclosed in connection with the securitization. The putative directive to destroy information may have coincided with Switzerland’s announcement that it would join the U.S., the European Union, and various countries in imposing economic sanctions on Russia in response to its startling and unjustified invasion of Ukraine.

Maloney and Lynch noted in their letter that a March 3, 2022, Credit Suisse Group press release raised additional questions about the “blind pool nature” of the securitization. The lawmakers wondered how participating investors can ensure their own compliance with international sanctions if documents Credit Suisse may have used to induce investor participation did not contain Credit Suisse borrower names or identifiers. That is presumably information the investors would need to know in order to ensure their compliance with international sanctions.

The representatives noted that Credit Suisse, for its part, said that whatever it told investors was merely “good housekeeping” and that it bore no relation to recent sanctions or the “ongoing conflict in Eastern Europe.” A March 3, 2022, Credit Suisse press release apparently confirmed the press reports and the lawmaker’s understandings of them in large measure if not in every detail. The Credit Suisse press release appeared to confirm, in its own words, that it “requested the non-participating investors to destroy documents relating to the [securitization deal].” Remarkably, Credit Suisse itself characterized the destruction as “good housekeeping and good data hygiene.”

The representatives expressed concern that Credit Suisse “may be concealing information” about whether the participants in the securitization, including owners of the yacht, private jet, and other securitized loan collateral, are presently evading international sanctions on Russia. Their letter and accompanying press release, as well as the Credit Suisse press release, appeared to focus on the new, Ukraine invasion related sanctions against Russia, but earlier sanctions also may apply. Credit Suisse has claimed that its instruction to destroy was something it was entitled to communicate under the securitization prospectus nondisclosure agreement and that it was “in no way linked to the recent implementation of additional sanctions—with which we are fully compliant.”

The letter requests that Credit Suisse “please produce” documents or information comprising all communications connected with confidential loan information, including any instructions to destroy same; all information communicated to solicit participation in the securitization deal; a list of all investors who participated; all related Know Your Customer and other due diligence, including all such diligence done in connection with sanctions compliance; and all communications with investors or “non-participating” investors in connection with compliance, including any communications related to the owners of the underlying collateral assets.

The letter concluded by restating the “broad authority” of the Committee on Oversight and Reform to investigate “any matter” at “any time” under House Rule X. They invited Credit Suisse to contact committee staff with questions.

Companies: Credit Suisse

LegislativeActivity: BankingOperations CrimesOffenses EnforcementActions SecuritiesDerivatives