A jury is ordering Credit Suisse (CS) to pay a $40 million verdict to Highland Capital Management LP. The hedge fund firm, based in Texas, accused the bank of duping it into refinancing a real-estate development that wasn’t solid. According to the ruling, issued in state court in Dallas, Credit Suisse is 65% at fault.
Highland’s Claymore Holdings LLC claimed that the bank knew it was employing a flawed appraisal to garner investments in Lake Las Vegas, which was a massive residential and resort community of over 3,500 acres that filed for bankruptcy six years ago. Credit Suisse said the investment did not go well not because it misled Highland but because of the recession.
The hedge fund company, however, contends that the flawed appraisal used by Credit Suisse inflated the value of collateral behind $540 million in loans to refinance the community in 2007. Highland says that the motivation was the fees made by Credit Suisse to underwrite the transaction.
Meantime, Credit Suisse claims that Highland knew what it was getting involved in. A lawyer for the bank maintains that the losses occurred because Highland Capital made a bet before the economic crisis, going ahead with an investment even though sales at Lake Las Vegas had stalled, to obtain a controlling position on the loan.
According to the Wall Street Journal, Highland’s Claymore Holdings LLC is looking to get another $300 million from the Swiss bank over the finding that the bank committed fraud.
This is not the first institutional investor fraud case filed by Highland against Credit Suisse. Two other Highland entities sued the bank in New York, accusing it of using bogus appraisals when it marketed the loans for a number of developments, including the Yellowstone Club in Montana. The securities case, seeking over $350,000, was thrown out by a court.
Highland funds sustained millions of dollars of losses after it invested loans arranged by Credit Suisse for Lake Las Vegas, Yellowstone Club, the Promontory Club in Utah, and Tamarack Resort in Idaho prior to the implosion of the real estate bubble. The bank marketed the loans to the owners of the projects, organizing financing for the loans from hedge funds, debt-fund manager, and private equity firms. Lenders would then gain exposure to the high-end real estate market. Meantime, the bank made millions of dollars in transaction fees.
All 12 properties that were valued under a specific appraisal method ended up having to restructure or going into bankruptcy. Meantime, investors lost hundreds of millions of dollars. Credit Suisse had to buy a lot of the properties that later failed at a discount.
In a separate but related case, Tim Blixseth, the former owner of Yellowstone, has been jailed for contempt of court after he failed to give an accounting of $13.8 million in proceeds from the sale of a resort in Mexico. Blixseth was ordered to pay over $200 million by a judge for diverting most of a Credit Swiss loan for his own use.
The SSEK Partners Group is an institutional investor fraud law firm.
Highland Wins $40 Million Verdict in Credit Suisse Case, Bloomberg, December 19, 2014
Former Billionaire Tim Blixseth Jailed Over Missing Funds, Forbes, December 18, 2014
Jury Awards Highland Capital $40 Million in Suit Against Credit Suisse, The Wall Street Journal, December 19, 2014
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