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Credit Suisse investigation into Archegos scandal reveals multiple failings but no ‘fraudulent or illegal conduct’

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Key Points
  • Archegos built massive stakes in certain stocks through swaps.
  • But a sell-off in these stocks meant the hedge fund was forced to inject more cash, amassing a forced liquidation of more than $20 billion.
  • The Archegos saga dominated the business headlines in March this year, with Credit Suisse being the worst hit out of several international banks involved.
  • The investigation concluded that there had not been "fraudulent or illegal conduct" nor ill intent from its employees.

In this article

VIDEO2:5102:51
Credit Suisse CEO: Achieved second-quarter goals despite Archegos challenges

LONDON — An investigation into Credit Suisse's dealings with the collapsed U.S. hedge fund Archegos Capital revealed Thursday that the Swiss bank had failed "to effectively manage risk."

The Archegos saga dominated the business headlines in March, with Credit Suisse being the worst hit out of several international banks involved.

Archegos built massive stakes in certain stocks through swaps, a type of derivative that investors trade over the counter or among themselves without having to disclose the holdings publicly and are highly leveraged. But a sell-off in these stocks meant the hedge fund was forced to inject more cash, amassing a forced liquidation of more than $20 billion.

A report published Thursday based on an independent external investigation, which was commissioned by the bank's board of directors, found a failure to effectively manage risk in the prime services business at Credit Suisse's investment banking unit "by both the first and second lines of defense as well as a lack of risk escalation."

"It also found a failure to control limit excesses across both lines of defense as a result of an insufficient discharge of supervisory responsibilities in the Investment Bank and in Risk, as well as a lack of prioritization of risk mitigation and enhancement measures," the announcement said.

One of the conclusions of the investigation said that "it seems likely that Archegos deceived Credit Suisse and obfuscated the true extent of its positions, which Archegos amassed in the midst of an unprecedented global pandemic."

"That said, the business and Risk had ample information well before the events of the week of March 22, 2021 that should have prompted them to take steps to at least partially mitigate the significant risks Archegos posed to Credit Suisse," it added.

VIDEO4:3004:30
Accident like Archegos must not happen again, Credit Suisse CEO says

The investigation also pointed out that nobody at the Swiss bank "appeared to fully appreciate the serious risks that Archegos's portfolio posed" even though "these risks were not hidden. They were in plain sight from at least September 2020."

Nonetheless, the investigation concluded that there had not been "fraudulent or illegal conduct" nor ill intent from its side and its employees.

In the wake of the sandal, the head of its investment bank, Brian Chin, and chief risk and compliance officer, Lara Warner, stepped down. The executive board decided to waive bonuses for the 2020 year, and also cut the proposed dividend.

Thomas Gottstein, CEO of Credit Suisse, told CNBC Thursday: "We are taking this event very seriously from the magnitude, but also how it happened and we want to take all the right lessons."

He also told CNBC's Geoff Cutmore that Credit Suisse wants to make sure that "an accident like Archegos will not happen again."

78% profit drop

The outcome of the investigation was published at the same time as the Swiss lender reported its second-quarter results.

Credit Suisse said its net income reached 253 million Swiss francs ($278.3 million) for the three-month period ending June, missing expectations in its own poll of analysts. With a figure of 1.16 billion Swiss francs for the same time last year, it meant that net profit had seen a drop of 78% over the year.

At the end of the first quarter, Credit Suisse reported a hit of 4.4 billion Swiss francs due to the Archegos saga. However, Credit Suisse said Thursday that it was taking an additional pre-tax loss of 594 million Swiss francs related to the hedge fund collapse. Credit Suisse has also been dealing another scandal involving Greensill Capital which filed for administration earlier this year.

Going forward, the bank said it wants to follow "a more conservative approach to risk" and to operate with a CET1 ratio, a measure of bank solvency, of at least 13%.

The stock fell more than 4% in early European trading hours on Thursday.

VIDEO10:3610:36
Watch CNBC's full interview with Credit Suisse CEO Thomas Gottstein

--- CNBC's Yun Li contributed to this report.