NORTH AMERICA – Within days of agreeing a $120m (€92.5m) settlement with the US Securities and Exchange Commission (SEC) over fraudulent practices relating to residential mortgage-backed securities (RMBS), Credit Suisse is being sued by the New York attorney-general for failing to evaluate or monitor loans underpinning them.

In papers filed with the New York Supreme Court, attorney-general Eric Schneiderman alleged the bank had committed "multiple fraudulent and deceptive acts" related to its failure to check that the loans had been extended to borrowers who were willing and able to repay them.

Schneiderman pointed to internal memos he claimed indicated the bank incentivised originators to create loans they knew were "garbage".

"[It] knew there were pervasive flaws in the screening process for loans underlying [the] RMBS, and failed to disclose the floors to investors," he said, claiming the bank had continued to securitise loans from "problematic" originators despite concerns raised by the bank's head of due diligence.

Both the SEC and the state of New York claimed RMBS issued by the bank eventually lost $11.2bn.

But Credit Suisse, while acknowledging the losses were unspecifically high, disputes the figure as "inaccurate and exaggerated".
 
In a statement, the bank accused Schneiderman of "recycling baseless claims from private lawsuits".

A source familiar with the matter described as "strange" Schneiderman's decision to file the suit the same week the SEC announced it would not proceed with its investigation.

Schneiderman co-chairs the Financial Fraud Enforcement Task Force's RMBS Working Group, which worked with the SEC on securing the settlement with Credit Suisse, as well as a second, $296m settlement with JP Morgan.

Although Credit Suisse agreed to pay damages as part of its settlement with the SEC, the bank declined either to admit or deny allegations including its primary claim that the bank had misled investors into thinking it would repurchase or substitute loans that missed payments when in nine of the 75 trusts investigated it had failed to do so.

At a news conference following the settlement, SEC enforcement director Robert Khuzami said: "By keeping the settlement proceeds and not repurchasing the loan from the trust, the firm unfairly profited."

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