Credit Suisse is having another rough week.
A U.S. Appeals Court reopened a 2018 case alleging that Credit Suisse had engaged in market manipulation of some exchange-traded notes that short the VIX, a popular proxy for volatility.
The reopened case comes as the European Commission announced on Wednesday that it had fined the bank and three others, alleging that they had formed a “cartel in the secondary trading market,” and as the United States Senate Finance Committee said it had launched a probe into Credit Suisse. The Finance Committee is looking at whether the bank allowed wealthy individuals to shield their assets from the government, in violation of a 2014 plea agreement. (Commenting on the EC, a spokesman said in an emailed statement that, “Credit Suisse continues to believe that the single former employee whom the EC criticized did not engage in anti-competitive conduct.” The bank intends to appeal the decision.)
The Swiss bank is also still reeling from taking significant losses related to the blow up of Archegos, the heavily leveraged family office of former hedge fund manager Bill Hwang.
Credit Suisse Bought Futures Contracts When Volatility Spiked
The plaintiffs — a group of investors led by Set Capital — allege that Credit Suisse issued exchange-traded notes shorting the VIX, shorthand for the Cboe Volatility Index, while also hedging against those notes, resulting in a liquidity squeeze that then eroded the value of the group’s investments.
The notes are unsecured debt securities sold by Credit Suisse and formally called VelocityShares Inverse VIX Short Term Exchange Traded Notes.
In other words, the investors were using unsecured debt to short the volatility index, which spiked in 2011, 2015, and 2016, according to the appeal.
The appellate judges’ decision said that during these three times, Credit Suisse bought VIX futures contracts to hedge against potential losses on the ETNs. But with insufficient liquidity in the futures markets, Credit Suisse caused prices to spike, and the value of the XIV notes to plummet. The U.S. Appeals Court for the Second Circuit said, “If proven at trial, this alleged conduct was manipulative under our precedents.”
“Plausible” Claims
Set Capital and the others suing Credit Suisse said that this amounted to market manipulation, which Credit Suisse denies. The plaintiffs also alleged that during the price spikes, the price information for the XIV ETNs was not being updated as it should have been by Credit Suisse.
The appellate judges threw the latter of the two claims out, according to their decision.
“We are pleased that the court has affirmed the dismissal of a significant portion of the case, and we remain confident that plaintiffs’ remaining claims are inconsistent with the facts, without merit, and will be dismissed in due course,” a spokesperson for Credit Suisse said via email Wednesday.
However, the claims of market manipulation remain “plausible,” according to the judges’ decision.
“We believe that Credit Suisse and its former CEO intentionally misled and manipulated investors so that they could profit while investors suffered devastating losses, and we are pleased that this critical case is moving forward,” said Michael B. Eisenkraft, a partner at Cohen Milstein who represents some of the plaintiffs, in a statement Wednesday.
