Pallas Partners is coordinating proceedings in the Swiss courts on behalf of around 800 Credit Suisse AT1 bondholders who held securities valued at $1.7bn. The bondholders have filed claims against Swiss regulator the Financial Market Supervisory Authority (FINMA), alleging that FINMA’s decision to write down the value of the bonds to zero as part of UBS’s acquisition of Credit Suisse should be considered invalid and the value of the bonds reinstated.
Pallas explained in a statement that the first claim was filed on 18 April on behalf of two groups of bondholders: one comprised of ‘over 90 global institutional investors and asset managers’, with holdings valued at $1.35bn, and another of ‘more than 700 retail and family office clients’, with holdings valued at over $300m.
In comments to Legal Business, Pallas founder and managing partner Natasha Harrison said that the firm had made a further filing on 2 May ‘for those institutions and retail investors who have joined our group since the April filing.’
‘Both filings argue that FINMA should not have had and/or should not have exercised any power to write down the AT1s, on the basis of Swiss public law and constitutional protections of property, and against arbitrary, unreasonable, or disproportionate decisions by a regulator.’
Tomas Poledna of Poledna RC and Urs Saxer of Steinbrüchel Hüssy are acting as Swiss counsel, while Swiss disputes firm LALIVE is providing advice on contractual and capital markets law.
AT1s, or additional tier 1 capital, were created after the 2008 financial crash to help provide stability to the European banking system. They can be converted into common stock or temporarily or permanently written down in times of crisis, under conditions specified in the prospectuses viewed by buyers.
Crucially, FINMA’s decision to write down the Credit Suisse AT1s did not occur under either of the conditions outlined in the Credit Suisse AT1 prospectuses. Instead, FINMA’s power to write down the bonds came from an emergency ordinance adopted by the Swiss Federal Council on 19 March: the same Sunday that saw the UBS deal announced and the bonds written down.
Bondholders also argue that the decision to pay out to Credit Suisse’s common stockholders upends the standard bank insolvency hierarchy of claims, which would usually see stockholders compensated only after bondholders and AT1 holders.
For these reasons, the bondholders argue that the write-down was illegitimate – that, in the words of Pallas’s statement, ‘FINMA ordered the arbitrary violation of the property rights of the AT1 holders, in breach of Swiss constitutional and other legal protections.’
Harrison said on this point: ‘This was an abuse of process and the resolution procedure should not be used by Switzerland to enable UBS to take over Credit Suisse to the detriment of AT1 holders.’
The filings are among the opening shots in what is set to be a protracted battle over the write-down of the AT1s, and follow a claim filed in April by US firm Quinn Emanuel Urquhart & Sullivan on behalf of more than 400 institutional investors who held bonds valued at $4.5bn.
At present, Legal Business understands that there are no plans for Pallas and Quinn Emanuel to coordinate their claims.
‘Further actions will follow’, Pallas said in its statement. ‘Pallas and Swiss counsel are building a multi-jurisdictional litigation strategy.’
Harrison explained further: ‘We will be opening up proceedings in the US and London, including seeking discovery under those regimes. We will be arguing and bringing claims for miss-selling, securities fraud, and misrepresentation against UBS in London, New York, and the Cayman Islands. We will also be pursuing claims against the Swiss state under bilateral investment treaties, which would likely be determined by a neutral tribunal in Washington.’
