Abu Dhabi Commercial Bank (ADCB) has sued Credit Suisse and Standard and Poor's (S&P) in New York, alleging they gave false and misleading information about a complex investment vehicle in which the bank put money three years ago.
The case is the second that ADCB has filed against western financial institutions over structured investment vehicles (SIVs). ADCB sued Morgan Stanley, S&P and Moody's Investors Service in 2008 over an investment in an SIV issued by Cheyne Finance. That case is continuing.
ADCB announced yesterday it had filed a suit in New York district court involving Stanfield Victoria, an SIV in which a source close to ADCB said the bank invested about US$40 million (Dh146.9m) in 2006 and 2007. When Stanfield began to teeter on the brink of insolvency in 2007, ADCB alleges it was "induced to enter into an emergency restructuring" of the investment. Credit Suisse, ADCB claims, failed to disclose conflicts of interest and "other material information" related to the restructured investment, called Farmington. S&P, meanwhile, is alleged to have given "inaccurate investment-grade ratings" to assets underlying the SIV.
As part of the restructuring, ADCB said it was required to buy credit default swaps (CDS), a form of insurance against default, to protect Credit Suisse's exposures to Farmington. It was allegedly led to believe that investment was "relatively safe and carried minimal risk". ADCB's exposure to the CDS is worth about $280m, the source said, but at present it can recover only about $210m to $230m, implying potential losses of up to $70m on the investment.
A spokeswoman for Credit Suisse, the Swiss investment bank, declined to comment. S&P, one of the world's three big credit ratings agencies, also declined to comment.
SIVs were complex financial instruments that grew popular during the global boom in credit markets before the global financial crisis. They attempted to make money by selling short-term debt at low interest rates and using those funds to buy longer-dated securities that offered better returns.
Many collapsed when short-term financing dried up and their investments in mortgage-backed securities faltered because of the US sub-prime housing crisis. There are now no SIVs remaining.
"Over the past 18 months we have worked hard to refocus ADCB's strategy, and have made clear progress, as illustrated by our return to profit in the third quarter of 2010," said Ala'a Eraiqat, the chief executive of ADCB. "We have also taken all steps necessary to recover the bank's exposures; this has included legal action. This latest action is brought with the aim of protecting the bank from potential losses. While we don't anticipate a material impact on our earnings as a result of the disputed exposure, we believe, for the benefit of all our key stakeholders, it is appropriate to take action against parties who we believe misled ADCB."
ADCB has already fully provisioned for its original $40m investment in Stanfield Victoria. The suit focuses on Farmington, which Credit Suisse is alleged to have misrepresented, aided by S&P's allegedly improper assignment of investment-grade ratings to the underlying SIV assets.
The exposures to the Cheyne and Stanfield SIVs have caused major write-downs in the past year at ADCB, compounding financial trouble related to embattled companies in the Gulf. ADCB has one of the largest exposures among local banks to Dubai World, the government-owned conglomerate that recently reached an agreement with creditors to restructure $24.9bn of debt.
ADCB lost Dh559.5m last year and an additional Dh527.3m in the second quarter of this year, mostly because of soured investments and loan defaults. It returned to profit in the third quarter, gaining Dh317.7m.