Credit Suisse Could Owe $2 Billion Over Fraud: Judge

Credit Suisse Group faces a potential $2 billion of exposure over fraud that occurred a decade ago at National Century Financial Enterprises, a result of a federal judge's determination on how to apportion responsibility.

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Alessandro Della Bella

Friday's decision by U.S. District Judge James Graham could expose the Swiss bank to hundreds of millions of dollars of added liability over the activities of Lance Poulsen, who co-founded National Century in 1990 and was its chief executive. He is now serving a 30-year prison term and is presumed insolvent.

The decision is also a victory for bondholders including the state of Arizona, AllianceBernstein Holding, Lloyds TSB Bank, MetLife, Allianz's Pimco unit that accused Credit Suisse of deceiving it about the company and missing its estimated $2.9 billion fraud.

"Credit Suisse and Mr. Poulsen are the last remaining defendants in this very serious case, and we are confident that our clients will prevail at trial," Kathy Patrick, a lawyer for some of the bondholders, said in a telephone interview.

Jack Grone, a Credit Suisse spokesman, declined to comment. Harold Levison, who represents MetLife and Lloyds, did not immediately respond to a request for comment.

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Patrick estimated that there are more than $1.5 billion of bondholder claims against Credit Suisse, the placement agent for many of National Century's notes.

But the payout could be augmented by interest that has accumulated in more than nine years of litigation.

According to a transcript of a Jan. 7 court hearing, Graham said "there seems to be general agreement that if the plaintiffs succeed in this litigation, they would recover something in the range of almost $2 billion."

A trial is scheduled for April 1.

No Shifting of Liability

National Century had helped finance hundreds of clinics, hospitals and other service providers, and bought accounts receivable from these providers with money it got by selling notes to investors.

But the U.S. Department of Justice said National Century misused investor money, funneled corporate funds to top executives, and lied to investors to hide the fraud. The Dublin, Ohio-based company filed for bankruptcy protection in November 2002.

Credit Suisse had sought a ruling that it should not be solely liable for any fraud attributable to Poulsen, who is now 69 and is the only other defendant remaining in the case.

But Graham said that under New York law, the bank could be held fully responsible for Poulsen's wrongdoing if a jury found they jointly caused bondholder losses.

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"Even if Credit Suisse could prove at trial that Poulsen is insolvent, its argument that responsibility for some portion of his share should be shifted away from Credit Suisse and redistributed among the settling defendants finds no support in the (law)," he wrote.

The judge normally sits in Columbus, Ohio, but the lawsuits were recently moved to Manhattan federal court and his opinion was made publicly available there.