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Credit Suisse Hit with $24 Billion Fraud Lawsuit

CS allegedly extended predatory loans to Ginn sur Mer, Lake Las Vegas, Tamarack, and Yellowstone Club in order to gain control once they defaulted.

By Toby Tobin
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Palm Coast, FL – January 6, 2010 – Credit Suisse Bank and real estate service firm Cushman & Wakefield defrauded developers and property owners at four luxury resorts; Ginn sur Mer (Grand Bahama Island in the Bahamas), Lake Las Vegas, Tamarack (Tamarac/Donnelly, Idaho), and Yellowstone Club (Montana), according to a lawsuit filed Sunday in the U.S. District Court for the District of Idaho. Plaintiffs, led by L.J. Gibson and Beau Blixseth seek $24 billion, including $16 billion in punitive damages.
The 81-page complaint could be the foundation for a John Grisham novel. Credit Suisse, one of the largest banks in the world, recently paid fines totalling $536 million to avoid prosecution by "pleading guilty to a Criminal Information in which CS admitted having engaged in a scheme with the Government of Iran to strip identifying information from wire transfers of amounts in excess of $1 billion from Iranian banks needing to purchase technology in US dollars, in order to circumvent United States and United Nations economic sanctions" against Iran. The complaint alleges that some of the money earned by CS from the Iranian scam [story] was used to fund the predatory loans to the four developers.
Here are some of the offenses charged in the complaint: [Read Full Complaint]
Defendants (Credit Suisse and Cushman & Wakefield) created a "predatory" non-recourse lending scheme believed to be funded in part by Credit Suisse AG's fraudulent scheme to assist Iranian agencies to circumvent international economic sanctions in return for millions in fees, some of which were used to fund the developers' loans.
In what the complaint refers to as the "loan to own" scheme, defendants violated U.S. law by setting up an off-shore shadow bank (Credit Suisse Cayman Island Branch) solely to circumvent standardized appraisal methodology. Cushman & Wakefield used the "Total Net Value" method to appraise resort developer properties rather than the industry accepted "fair market value" standard. The elevated appraisals supported abnormal loan values.
Credit Suisse encouraged developers to "take equity out of their investments 'up front' by mortgaging their development projects to the hilt."……"The development owners were advised, encouraged, requested and instructed by CS to take out personally very significant sums of money from their development accounts either as a 'profit dividend,' or as a loan, leaving their developments burdened with excessive and unsustainable debt."
Defendants conspired to modify non-recourse loans in a manner that gave defendants control over foreclosed assets. To this end, they managed to be named as "Loan Administrator" and "Lending Advisor." In said roles, they "encouraged each developer to rely exclusively on CS and C&W for financial advice, property development advice, marketing advice, and other matter related to each land development, while simultaneously persuading the developer to increase the loan amount and become ever more indebted to CS and entrapped by its control."
The complaint charges that Credit Suisse, "took possession of the assets of Yellowstone Club through its "note-holder, Cross Harbor Capital partners (CHC); and the 'predatory lending practices' of CHC."
"There, CHC, had previously executed a purchase and sales contract on January 15, 2008 to purchase the assets of the Yellowstone Club for $455 Million dollars and repay the Credit Suisse loan, which would have protected the Yellowstone homeowners. Instead, it conspired with Credit Suisse, and became a 'note-holder.' It then conspired with the ex-wife of the developer to kill the sale, using in part the fake "Grand Jury Target Letters' against the developers, which letters had been created by the ex-wife's partner. In order to finance their scheme, the ex-wife had borrowed over $43 Million dollars of overtly fraudulent loans, based mostly on the fraudulent values of the Credit Suisse 'total net value' appraisal scheme. She then used those funds, in part, to finance her scheme to conspire with CHC to put Yellowstone Club into Bankruptcy. As part of their scheme, CHC loaned the ex-wife another $35 Million dollars to obtain full ownership of the Yellowstone Club knowing that the previous loans were procured by both the fraudulent Credit Suisse appraisal method, and by fraudulent loan applications containing additional fraudulent statements submitted to multiple lenders by the ex-wife. When CHC loaned her the $35 Million dollars to obtain control of the Yellowstone Club, it did so with full knowledge of the fraudulent and then defaulted federally regulated bank loans; and with full knowledge of the fraudulent Credit Suisse appraisal methods, and FIRREA violations, while operating as its insider 'note-holder' to take control of the Yellowstone Club."
The lawsuit is interesting for several reasons:
  • First, it points the finger at Credit Suisse when most industry observers have thought that the lenders were the victims (of their own stupidity). Of course it wasn't CS's money. They only brokered and serviced the loans, receiving millions in fees from each loan.
  • It's a stretch to think the developers could be duped by a fraudulent appraisal scheme, but after all, they all walked away with a major hunk of the loan proceeds. Perhaps they saw the handwriting on the wall and grabbed what they could. It's probably true that they wouldn't have seen the alleged end game of CS controlling the developments.
  • The lawsuit claims CS made representations to property owners, but property owners were mostly unaware of the CS loan and did not even know CS was involved. The lawsuit's claim that CS interfered with the developers' ability to satisfy promises to property owners (Tortuous Interference with Contractual Relations) has merit.
  • The amount of award sought is so large.
CS's motives have been clearly questionable. During the Yellowstone Club bankruptcy proceedings, they were excoriated by the federal judge. Here are just a few of his comments:
"Credit Suisse's actions in the case were so far overreaching and self-serving that they shocked the conscience of the Court."
"The only plausible explanation for Credit Suisse's actions is that it was simply driven by the fees it was extracting from the loans it was selling, and letting the chips fall where they may. The naked greed in this case combined with Credit Suisse's complete disregard for the [developer] or any other person or entity who was subordinated to Credit Suisse's first lien position, shocks the conscience of this Court. While Credit Suisse's new loan product resulted in enormous fees to Credit Suisse in 2005, it resulted in financial ruin for several residential resort communities. Credit Suisse lined its pockets on the backs of the unsecured creditors."
Credit Suisse's loan to Ginn was secured by three communities in addition to Ginn sur Mer; Tesoro, Quail West, and Laurelmor. CS did not gain control of these communities. All three were sold, Tesoro and Quail West through a bankruptcy sale. Was Ginn sur Mer Credit Suisse's target all along?
This is grand theater at its best.

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reader comments
No one would have compained if
Posted by George Meegan
Jan 06, 2010, 12:59 pm
The bubble was made of better material and could keep inflating forever. But they put in to much air to fast and POP! Now we are patching the bubble and watching it try to expand, but cracks are showing so we will have to redesign it perhaps with a pressure release valve. The statement that the developers did not know what was going on is probably incorrect, as over pricing of construction cost is their way of making money.

 
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Don "Toby" Tobin is a licensed real estate professional affiliated with Grand Living Realty. Toby is a member of the Flagler County Association of Realtors®, the Florida Association of Realtors, Enterprise Flagler, Flagler Home Builders Association, and the National Association of Realtors.

GoToby.com proivdes real estate news, commentary, and analysis for Palm Coast and Flagler Country Florida, as well as Realtor® referrals and consultation to buyers, sellers, and developers.