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According to Bloomberg, Ireland-based investment fund, Phoenix Light SF Ltd. sued Swiss banking major Credit Suisse Group AG (CS - Snapshot Report) for the misrepresentation of mortgage-backed securities (MBS). The securities were worth about $362 million.

The complaint was filed in a U.S. state court in Manhattan. The faulty securities originated from five other investors, which have collapsed or almost collapsed. Phoenix Light claimed that obscurity regarding the risks related to the MBS when they were sold led it to incur huge losses. Credit Suisse, on the other hand, was alleged to have got significant profits from the structuring, marketing and sale of the certificates.

Phoenix Light claimed that in the period from 2005 to 2007, the Swiss banking giant gave false information and withheld certain facts related to the credit quality of the loans underlying the securities. Additionally, the documents provided by Credit Suisse did not disclose that the bank was privately betting for the default of the securities.

Credit Suisse is not the only major bank to be embroiled in litigation hassles with Phoenix Light. Other U.S. banking giants like JPMorgan Chase & Co. (JPM - Analyst Report), and Goldman Sachs Group Inc. (GS - Analyst Report) have been slapped with charges of misrepresentation of MBS as well.

We believe that lawsuits such as these would lead to mounting litigation risks for Credit Suisse and dent both the company’s image and financials. If found guilty, Credit Suisse is liable to be fined by the authorities.

In such cases, companies often opt for settlements. However, this has chances of  exhausting the company’s financials, which could have been used in growth initiatives instead.

On the other hand, recoveries by Phoenix Light would reduce the losses from the risky investment.

Currently, Credit Suisse carries a Zacks Rank #3 (Hold). A better-performing foreign bank is BNP Paribas SA (BNPQY), which carries a Zacks Rank #1 (Strong Buy).

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