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According to Reuters, Credit Suisse Group AG (CS - Snapshot Report) agreed upon a settlement over charges levied against it by bond investors in National Century Financial Enterprises in lawsuits filed in the U.S. District Court, Southern District of New York. The note holders have accused the bank of raising money for the healthcare financial company, which went bankrupt in 2002. The settlement demands $400 million from Credit Suisse.

The lawsuit settlement will slash Credit Suisse’s fourth-quarter net profit by 134 million Swiss francs ($141 million) to 263 million Swiss francs ($277 million), reported in earlier February. Notably, the settlement of the lawsuits follows the dismissal of the bank’s bid to be tried in a separate hearing from convicted National Century’s co-founder Lance Poulsen in Jan 2013.

The Allegations

The lodged complaint claims that Credit Suisse helped sell the notes issued by National Century and concealed the risks associated with the bonds, including the ability of the borrowers to repay. Moreover, Credit Suisse has been accused of deliberately covering the alleged misuse of investors’ funds by the company along with National Century’s co-founder and Chief Executive, Lance Poulsen’s involvement in the fraud.

Therefore, the state of Arizona, AllianceBernstein Holding LP (AB - Snapshot Report), Lloyds TSB Bank Plc, MetLife Inc. (MET - Analyst Report), Allianz SE's investment management group, Pimco and other investors which purchased National Century bonds from 1998 to 2002, sued Credit Suisse on grounds of scam and conspiracy and filed the lawsuits.

Similar Issues

Earlier in Mar 2013, Credit Suisse resolved a lawsuit filed in 2010 by bond insurer Ambac Financial Group, Inc. The terms of the settlement were undisclosed. The plaintiff alleged that DLJ Mortgage Capital – a subsidiary of Credit Suisse’s U.S. division – and Credit Suisse Securities misrepresented the mortgage-backed securities (MBS), which were insured by Ambac in 2007.

Of late, the trend of bond insurers suing major banks associated with the underwriting of mortgage securities has become quite prevalent. JPMorgan Chase & Co. and Bank of America Corporation (BAC - Analyst Report) have also been entangled in lawsuits from bond insurers such as Assured Guaranty Ltd. and MBIA Inc., pertaining to the above-mentioned issue.

Legal Woes Continue

Trouble has been brewing for banks for quite sometime now owing to fraudulent representations and breach of contract. Banks face several other charges related to the sale of defective securities.

Litigation overhangs have been a common problem for major banks since the financial meltdown. In effect, these lawsuits are expected to tarnish their reputation and financials over time. However, investors and other financial institutions bearing the brunt of these faulty practices are expected to be fairly compensated.

Conclusion

Legal troubles such as these are expected to result in huge expenses and affect the top line of many financial institutions. However, the measures being undertaken by the regulatory and legal authorities to come down hard on such unwarranted activities of these institutions will provide huge relief to the investors.

With the settlement of the lawsuit, Credit Suisse plans to move forward with its business strategies. Moreover, pending lawsuits can further trigger financial hassles while tarnishing the company’s image. Therefore, it is in the interest of the company to resolve such matters at the earliest.

Currently, Credit Suisse retains a Zacks Rank #5 (Strong Sell).

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