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Credit Suisse Group (CS - Snapshot Report) seems to be in sticky waters with litigation issues arising from the sale of mortgage backed securities (MBS). The U.S. regulator for credit unions has sued its unit, Credit Suisse Securities (USA), for misrepresentation in the underwriting and sale of MBS worth over $715 million to three credit unions -- U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union, which collapsed later.

The Allegation

Credit Suisse has been accused by the U.S. regulator for credit unions -- National Credit Union Administration (NCUA) of issuing misleading statements and omitting important details from the offering documents of the MBS in question.

This led to obscurity regarding the risks associated with the MBS when they were sold. The credit unions perceived them to be less risky when in fact, the securities bore substantial risk. Moreover, it has been alleged that Credit Suisse has been ignoring the underwriting guidelines specified in the offering documents.

As a result, when these MBS lost their value for defaults in the underlying assets, the value of investments of the credit unions in these MBS plummeted. Subsequently, the three credit unions collapsed, leading to a crisis in the credit union industry.

Others in the Same Pool

Similar suits have been filed in the past by NCUA against other big shots like JPMorgan Chase & Co. (JPM - Analyst Report), Royal Bank of Scotland Group Plc. (RBS - Snapshot Report) and Goldman Sachs Group Inc. (GS - Analyst Report). Moreover, last year, NCUA reached settlements with Deutsche Bank AG (DB - Analyst Report) and Citigroup Inc. (C - Analyst Report) worth over $165 million.

Our Take

We believe that such suits would lead to mounting litigation risks for Credit Suisse, which pose a menace for both the company’s image as well as its financials. If found guilty, it is liable to be fined by the authorities.

Often, the company itself opts for settlements in order to reduce litigation hassles. Such a step on behalf of the company exhausts its financials, which could instead have been invested in growth initiatives. We remain skeptical and wait to see what the future holds.

On the other hand, recoveries by NCUA would result in lowering of losses that arose from the failure of the credit unions.

The shares of Credit Suisse retain a Zacks #3 Rank, which translates into a short-term Hold rating.

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