Residential Mortgage-Backed Securities Working Group Members Announce Charges Against Credit Suisse
Working Group Co-Chair New York Attorney General Schneiderman‘s Lawsuit Charges Credit Suisse Misrepresented Loan Quality Review Process, Deceived Investors
Residential Mortgage-Backed Securities (RMBS) Working Group Co-Chair New York Attorney General Eric T. Schneiderman today filed a Martin Act complaint against Credit Suisse Securities (USA) LLC and its affiliates for making fraudulent misrepresentations and omissions to promote the sale of RMBS to investors. According to New York Attorney General Schneiderman’s lawsuit, Credit Suisse deceived investors as to the care with which they evaluated the quality of mortgage loans packaged into residential mortgage-backed securities prior to 2008. The lawsuit also alleges that RMBS sponsored and underwritten by Credit Suisse in 2006 and 2007 have suffered losses of approximately $11.2 billion.
This is the fourth enforcement action from the RMBS Working Group, a joint federal and state initiative created by President Obama earlier this year to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of RMBS. RMBS were pools of mortgages deposited into trusts and then sold as securities to investors who were to receive a stream of income from the mortgages packaged in the RMBS.
According to the complaint, Credit Suisse led its investors to believe that the quality of the loans in its mortgage-backed securities had been carefully evaluated and would be continuously monitored however, Credit Suisse did neither. The complaint alleges that instead, Credit Suisse systematically failed to adequately evaluate the loans, ignored defects that its limited review did uncover, and kept its investors in the dark about the inadequacy of its review procedures and defects in the loans. The complaint further alleges that the loans in Credit Suisse’s mortgage-backed securities included many that had been made to borrowers who were unable to repay the loans, were very likely to default, and ultimately did default in large numbers.
“This lawsuit against Credit Suisse marks another significant step in our efforts to hold financial institutions accountable for the misconduct that led to the worst financial crisis in nearly a century,” said New York Attorney General Schneiderman. “Our investigations and legal actions demonstrate that there must be one set of rules for all – no matter how big or powerful the institution may be – and that those rules will be enforced vigorously. We need real accountability for the illegal and deceptive conduct in the creation of the housing bubble in order to bring justice for New York’s homeowners and investors.”
RMBS Working Group members contributed significantly to this effort. The Federal Housing Finance Agency Inspector General played a key role working with the New York Attorney General’s Office on the investigation, providing investigators and lawyers, the U.S. Securities and Exchange Commission (SEC) collaborated and assisted with the case, and the Department of Justice provided resources from U.S. Attorney’s offices around the country as well as from the RMBS Coordinating Team.
“Credit Suisse allegedly engaged in a far-reaching scheme to defraud investors, including Fannie Mae and Freddie Mac,” said FHFA Inspector General Steve Linick. “As victims, Fannie Mae and Freddie Mac have sustained significant losses, which to date have been borne by taxpayers. This lawsuit sends the clear message that reckless lending practices will not be tolerated.”
The Department of Justice’s specific role in the investigation included providing 11 Assistant U.S. Attorneys from offices all over the United States who interviewed more than 40 significant market participants. In addition, the Department of Justice provided 11 investigative analysts to assist in the review of millions of documents.
Today’s filing by our working group partner and my fellow co-chair New York Attorney General Schneiderman, represents another step toward holding accountable those whose actions led to the financial crisis and hurt so many Americans,” said Principal Deputy Assistant Attorney General for the Civil Division Stuart Delery. “This action demonstrates the value and strength of the working group model and was made possible by contributions from a variety of members of the working group, who contributed resources, personnel and expertise to the development of this case.”
“The number and breadth of recent RMBS actions, and the coordination and sharing among enforcement authorities that underlie them, prove that the whole of the RMBS Working Group is greater than the sum of its parts,” said Robert Khuzami, Director of the SEC’s Enforcement Division.
The New York Attorney General seeks investor damages to recoup these losses, as well as other equitable relief.
Today's announcement is part of the ongoing efforts of President Obama's Financial Fraud Enforcement Task Force's Residential Mortgage-Backed Securities (RMBS) Working Group, a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead the 2008 financial crisis. The RMBS Working Group brings together more than 200 attorneys, investigators, analysts and staff from dozens of state and federal agencies including the Department of Justice together with 10 U.S. Attorneys' Offices and the FBI, the SEC, the Department of Housing and Urban Development (HUD), HUD's Office of Inspector General, the Federal Housing Finance Agency's Office of Inspector General, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board's Office of Inspector General, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network and more than 10 state attorneys general offices around the country.
The Working Group is led by five co-chairs: Director of Enforcement for the SEC Robert Khuzami, New York State Attorney General Eric Schneiderman, Assistant Attorney General for the Justice Department's Criminal Division Lanny Breuer, Principal Deputy Assistant Attorney General for the Justice Department's Civil Division Stuart Delery and U.S. Attorney for the District of Colorado John Walsh. The RMBS Working Group Coordinator is Matthew Stegman. For more information about the RMBS working group and the Financial Fraud Enforcement Task Force, which is chaired by Attorney General Eric Holder, visit: www.stopfraud.gov .