Second Circuit upholds record-setting ARS award v.Credit Suisse

Second Circuit upholds record-setting ARS award v.Credit Suisse

ThompsonReuters, 6/3/2011

In the years since the market for auction-rate securities collapsed in February 2008, the big investors who held billions of dollars in the thinly-traded instruments have had a tough time getting their money back from the financial institutions that issued the securities. Small investors were made whole via buyback agreements most issuers and ARS brokers reached with state and federal regulators, but the big boys weren't covered by those settlements. Many have sued; few have scored big recoveries.

One notable exception to that rule of frustration is STMicroelectronics. In 2009, a Financial Industry Regulatory Authority arbitration panel ordered Credit Suisse to pay STMicro $400 million in compensatory damages, plus interest, fees, and expenses; STM was ordered to return its auction-rate securities to Credit Suisse. (Credit Suisse, you may recall, employed the two brokers later convicted for lying to clients about the auction-rate securities in their portfolios. STMicro, meanwhile, was represented at the arbitration by onetime Enron prosecutor Andrew Weissmann of Jenner & Block.)

There was a wrinkle though: Credit Suisse asserted that one of the arbitrators failed to disclose that most of his work had been for claimants, not for defendants. The bank went to Manhattan U.S. district court to appeal the FINRA award, arguing that the arbitrator concealed his predisposition for STMicro--so, even under the extremely tough standard for vacating an arbitration award, the FINRA ruling should be overturned. Judge Deborah Batts disagreed. In March 2010 she confirmed the panel's award.

Before Judge Batts's ruling, STMicro agreed, at Credit Suisse's urging, to sell some of the auction-rate securities in its portfolio to Deutsche Bank for about $75 million, taking a $78.5 million loss on what it paid for the ARS. Credit Suisse asked the judge to offset STMicro's award by the $75 million from Deutsche Bank. Judge Batts refused.

On Thursday, Credit Suisse won its biggest victory in the STMicro ARS case-but that's a very low bar.A three-judge panel of the U.S. Court of Appeals for the Second Circuit agreed with the bank and its lawyers at Mayer Brown that Credit Suisse does not have to pay interest on the $75 million Deutsche Bank paid for some of the STMicro auction rate securities. That's all Credit Suisse got, though. The appellate panel (Second Circuit judges Gerald Lynch and Robert Sack and Chief Judge Loretta Preska of the U.S. district court for the Southern District of New York, sitting by designation) rejected the bank's challenge to the validity of the FINRA arbitration award and agreed with STMicro and its Jenner & Block lawyers that Credit Suisse must pay interest on the award.

The Second Circuit panel was emphatic about it, too. "We may reject Credit Suisse's claim without diving too deeply into these difficult legal waters," wrote Judge Lynch. "Close consideration turns up very little factual support for Credit Suisse's claim of improper disclosure - too little to vacate the award under any conceivable legal standard."

A Credit Suisse spokesman told OTC that the ruling "will have an immaterial impact" on the money already set aside for the case. Jenner & Block declined comment. Credit Suisse counsel Andrew Frey of Mayer Brown didn't return a call for comment.

(Reporting by Alison Frankel)

A previous version incorrectly stated that the Second Circuit three-judge panel agreed with the bank and its lawyers at Mayer Brown that $75 million should be subtracted from the award to STMicro.