CHICAGO (Reuters) – When high-end Lake Las Vegas real estate development collapsed during the 2008 financial crisis, 31 funds that helped finance the project lost a total of $ 540 million. But only one, Dallas-based hedge fund Highland Capital Management, has taken legal action against Credit Suisse Group AG, which arranged the project’s financing and valuations.
Highland ultimately convinced a Texas court that Credit Suisse had broken its contract and aided and abetted fraud in the deal, and the ruling was upheld on appeal. Today, Credit Suisse faces a July 18 deadline to pay Highland $ 360 million or appeal to the Texas Supreme Court.
The victories to date have improved the reputation of a fledgling Texas law firm, and legal experts say they are likely to encourage other investment funds to sue the big banks.
“This case shows that big banks cannot hide behind warnings when they know certain facts,” said Carol Gilden, a lawyer who represents pension funds and other institutional investors in financial and stock market disputes.
Global banks have settled dozens of lawsuits by governments and shareholders for financial crisis misconduct, but until the Highlands lawsuit, it was unusual for an investment fund to pursue fraudulent actions that were difficult to find. win – especially against a major trading partner, as Credit Suisse did. for Highland.
Highland, however, has a reputation for being more legally aggressive than many funds, and his general counsel, Scott Ellington, had a strong idea that something was wrong with the deal.
“When something is wrong, I like to fix it,” Ellington told Reuters in an interview.
The company struggled to find someone willing to take on the case, he said, in part because the law firms it contacted believed Ellington’s suspicions would be difficult to prove. Then, in 2010, Ellington met Reid Collins & Tsai LLP, a newly formed Austin, Texas firm specializing in complex commercial litigation. The firm agreed to take the case in case of an emergency.
Many in the industry were surprised when Reid Collins & Tsai won the lawsuit in 2015 and a Dallas appeals court upheld the $ 287.5 million judgment in February. Since 2015, interest has accrued at an annual rate of 9%.
Credit Suisse, which has consistently denied responsibility for Highland’s losses, “respectfully disagrees” with the court rulings and is seeking to appeal, spokeswoman Nicole Sharp said in a statement. The bank noted that it won an unrelated legal dispute with Highland in New York City and another in Texas was fired.
“OASIS” OR MIRAGE?
Lake Las Vegas, featured in promotional material as “an oasis in the desert,” was one of many ill-fated, high-end real estate projects for which Credit Suisse syndicated loans in the run-up to the crisis. of the 2008 credit.
The development was to include a luxury golf community and resort with 9,000 homes and condominiums, two hotels, a casino, a shopping village and a 320-acre man-made lake.
The funds managed by Highland loaned $ 250 million to the $ 540 million project in June 2007 after being approached by Credit Suisse, which agreed to provide an independent valuation. This appraisal valued the property at $ 891 million.
When Lake Las Vegas filed for bankruptcy a year later, the property’s liquidation value was pegged at $ 23 million. The project has since been partially built by new developers, but early lenders like Highland lost their entire investment in bankruptcy.
In the aftermath, said Ellington, he couldn’t stop thinking about the initial valuation and wondering how a property could have lost so much value so quickly.
“When we had the case in 2010, we thought there was reason to believe the valuation was bad, and no evidence that we could pin Credit Suisse,” William T. Reid IV told Reuters, founding partner of Reid Collins & Tsai.
BUILD A CASE
Initially, the law firm filed a lawsuit accusing the appraiser, CBRE, of artificially inflating land values and sales forecasts. In the discovery, the company obtained communications from Credit Suisse regarding these valuations.
Highland settled its lawsuit against CBRE, which did not admit liability, in 2013, but materials obtained during the discovery encouraged the company to sue Credit Suisse as well.
An original and inferior valuation of CBRE had been changed after pressure from Credit Suisse, Highland alleged.
This claim was based in part on communication between CBRE assessor William Acton and Arik Prawer of Credit Suisse, one of the Credit Suisse bankers involved in the transaction.
“I relaunched the numbers as requested,” Acton wrote in an email after a call with the Credit Suisse banking team. Highland argued that the emails showed Credit Suisse manipulated the process and then submitted an overrated appraisal to lenders like Highland to convince them to back the loan. Acton died in September 2007.
Credit Suisse argued that it was not responsible for verifying CBRE’s valuation and that the disclaimers in the credit agreement prevented Highland from pursuing claims.
Credit Suisse has a long chance to have its case heard by the Supreme Court of Texas. In the past five years, the court has accepted only 11.2% of the cases brought to it, according to annual Texas Justice Statistical Reports analyzed by Reuters.
However, among the cases handled by the court, judges reverse about 82% of the time, according to a 2012-2016 study by appellate lawyer Pamela Stanton Baron.
Meanwhile, a separate $ 350 million Highland lawsuit accusing Credit Suisse of fraud and breach of contract in six other land deals is still pending in New York.
Reporting by Tracy Rucinski; Editing by Lauren Tara LaCapra and Sue Horton