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Credit Suisse Sued by New Jersey AG

Zacks Equity Research

Credit Suisse Group AG’s (CS) legal woes continue to multiply. The Swiss bank was recently sued by New Jersey’s Attorney General (AG), John J. Hoffman. Hoffman accused the bank of deception while selling $10 billion of residential mortgage-backed securities (RMBS) to investors.

The lawsuit is part of the Department of Justice’s and Residential Mortgage-Backed Securities Working Group’s investigation into faulty mortgage sales. According to court filings, currently 16 financial institutions are under investigation by the state working group for sale of faulty mortgages. These 16 financial institutions include Citigroup Inc. (C), Bank of America Corporation (BAC) and UBS AG (UBS).

The plaintiff alleged that Credit Suisse duped investors, including charities and public and private pensions, into buying RMBS underwritten by the bank in 2006 and 2007. The lawsuit alleged that these mortgages were backed by faulty home loans that failed to meet the bank’s own underwriting standards. This led to losses of more than $1 billion to the investors.

The lawsuit also charged Credit Suisse for misinforming investors. The Swiss bank failed to disclose that almost 25% of the home loans packaged into the RMBS were faulty. Moreover, the company did not reveal that its own traders had refused to hold some of those loans. Further, Credit Suisse allegedly did not pass on the reimbursements it received from loan originators for delinquent loans to the trusts holding the securities.

Credit Suisse has been plagued by litigation problems in the recent past. The New York AG had filed a similar lawsuit filed last year against the bank. Additionally, the banking major paid $120 million last year to settle civil action by the Securities and Exchange Commission related to its mortgage sales practices, without admitting or denying wrongdoing.

Many major global banks are facing a wave of lawsuits, which charge them of selling substandard mortgage securities prior to the financial crisis. These have added to the legal woes of banks in recent times.

Though these lawsuits could tarnish the image of the banks, investors and financial institutions that suffered due to these faulty practices are expected to be fairly compensated.

Credit Suisse currently carries a Zacks Rank #3 (Hold).

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