The case is the second filed by the Abu Dhabi government-controlled bank in New York involving complex financial instruments known as structured investment vehicles that fell prey to the credit squeeze brought on by the subprime mortgage crisis in the US.
ADCB alleges that Credit Suisse failed to disclose conflicts of interest and provided misleading information when packaging and selling the investment vehicle, which went by the name Farmington. The bank says it was pressured to invest in the deal in 2007 to protect its stake in an earlier, similar investment known as Stanfield Victoria that was coming under pressure at the time.
As part of the agreement, ADCB claims it was required to enter into another transaction known as a credit default swap designed to protect Credit Suisse’s exposure to the Farmington deal, which it believed “carried minimal risk.”
Structured investment vehicles were set up to borrow money by issuing short-term securities at a low interest rate.
They would lend that money by purchasing long-term securities at higher interest. Investors were able to profit from the difference, as were issuing banks that charged fees to structure them.
ADCB is suing S &P because it alleges the rating house made inaccurate assessments tied to the Farmington investment by assigning ratings to underlying assets that were “investment-grade,” suggesting they were relatively safe.
Ala’a Eraiqat, ADCB’s chief executive said the lawsuit aims to protect the bank from potential losses, but he doesn’t expect it to have a major effect on the company’s earnings.
“For the benefit of all our key stakeholders, it is appropriate to take action against parties who we believe misled ADCB,” he said in a statement outlining the lawsuit. “On close examination, the investment was sold to the bank in an unacceptable manner.”
Representatives for Credit Suisse and S &P declined to comment.
ADCB is pursuing a separate suit involving structured investment vehicles against Morgan Stanley, S&P, and another rating agency, Moody’s Investors Service.
That case, a class-action suit filed in 2008, seeks damages resulting from the collapse of an SIV known as Cheyne that was backed by US mortgages and other securities.
