x Abu Dhabi, UAETuesday 25 July 2017

ADCB sues US financial firms

Abu Dhabi Commercial Bank alleges that the bank was misled about investments in a fund that collapsed in the US subprime mortgage debacle.

ADCB has sued several US financial firms and rating agencies.
ADCB has sued several US financial firms and rating agencies.

Abu Dhabi Commercial Bank (ADCB), which has acknowledged suffering hundreds of millions of dollars of losses from investments linked to US subprime mortgages, has sued several US financial firms and rating agencies, alleging the bank was misled about investments in a fund that collapsed in the US subprime mortgage debacle. ADCB filed a group legal action yesterday against Morgan Stanley, Bank of New York Mellon, and credit rating agencies Moody's and Standard & Poor's, alleging they gave a high rating to a fund without disclosing risks involved. The bank said yesterday it has reached out to talk "with other GCC banks and investors about joining this class action, and based on these conversations ADCB expects additional investors to join or support the legal action as required".

ADCB, the country's third largest bank, lost nearly Dh1 billion (US$272.5 million) in its investment in debt markets tied to the US subprime mortgages. The bank seeks unspecified money damages and class-action status on behalf of everyone who invested in the failed fund from Oct 2004 to Oct 2007. It said yesterday, a day after its complaint was filed in a US federal district court in New York City, that it seeks to recover losses "suffered by it and other GCC investors" from investing in debt markets.

ADCB's court action is related to Cheyne Finance, a structured investment vehicle (SIV). An SIV raises funds through short-term, low interest borrowing, which it then lends out as long-term debt. The US subprime market began to unravel last year as millions of mortgage borrowers defaulted, and losses have continued to mount from such investments. SIVs once held as much as $350bn in assets but they are now unable to refinance their short-term debt because of the global credit crunch.

ADCB said it its complaint that investments in Cheyne were now worth zero, and it blamed Morgan Stanley, Bank of New York Mellon and the two rating agencies for the losses. "Instead of protecting the SIV and its investors as promised, defendants exposed the SIV to significant undisclosed risks," the court action said. "Defendants knew the assets purchased and held by the SIV were risky and of poor quality. They further knew the models used to generate the high rates were flawed."

Simon Copleston, the general counsel of ADCB, declined to comment on the court action. ADCB made provisions of Dh493.5m last year and Dh130.5m so far this year. @email:mjalili@thenational.ae