Credit Suisse knew fraudster went rogue years before
The Credit Suisse Group had discovered that a now-disgraced relationship manager, whose high-net-worth clients included the former Prime Minister of Georgia, had been engaged in compliance violations that resulted in the bank repeatedly taking disciplinary action against him years before he lost $400 million of the politician’s money.
His fraudulent actions garnered huge sums that he used to finance a lavish lifestyle.
The new evidence is on top of more than a week of testimony and cross-examination largely about Patrice Lescaudron’s activities, some of which was criminal in nature and led to the banker being sentenced to a five-year prison term. He was released early because of ill health but committed suicide more than a year ago.
The revelations were made during the second week of a trial in which Bidzina Ivanishvili, the former Prime Minister of Georgia, is suing Credit Suisse Life (Bermuda) for $400 million.
Mr Ivanishvili is not only a former politician but is often referred to as an oligarch because, while finishing his education in Russia at the end of the communist era, he saw opportunities in the technology and banking sectors and made billions of dollars.
The billionaire, who is on the Forbes List as being among the world’s wealthiest people, says that the rogue relationship manager should have been prevented from losing the millions of dollars of his fortune when he was first suspected of committing misdeeds.
Mr Ivanishvili himself became aware that something was wrong when he received a demand for $400 million to cover the cost of Raptor Pharmaceutical Corp shares, the total amount of which represented an approximately 5 per cent stake in the company. When a new drug being developed by Raptor failed testing, the value of the stock had collapsed and the demand for the payment was made.
The holding was a significant part of two unit-linked life insurance policies’ investment portfolios, largely financed via a credit strategy. The policies are tax-saving financial products that allow for both insurance and investment. The holder of the policy can also withdraw or, in other words, ask for the surrender, of funds.
A letter written by Mr Ivanishvili in January 2017 — a year and a half after he made the discovery of his losses — to the head of the bank and passed on to the former chief executive officer and director of Credit Suisse Life (Bermuda), Thomas Coffey, was discussed in the Bermuda-based insurance executive’s witness statement.
Joe Smouha, QC, acting for the former Georgian leader, said that the letter set out his client’s serious concerns regarding what had happened to his investments, and complaining about the lack of information he had been given in respect to the “huge and unexplained losses” on his accounts.
Mr Ivanishvili had noted in the letter that during a ten-year period he had placed between “$2.5 billion and $3 billion in accounts and structures created for me by Credit Suisse”.
He said that his assets, at the time of writing the letter, stood at $1.3 billion.
Mr Coffey agreed that among the structures to which Mr Ivanishvili referred were life insurance policies with Credit Suisse Life (Bermuda).
In other testimony, the former CEO said that at the time of the Raptor loss he was only aware that there was something big going on about a well-known client and that client also had policies in Credit Suisse Life. He did not know that the losses had largely occurred in the client’s life insurance policy accounts, which were held in CS Life, of which he was CEO.
Mr Smouha asked the insurance executive how it was not a Credit Suisse Life issue if the question was which of his clients’ accounts were affected and by how much.
Mr Coffey replied: “As I understand it, the client had some direct accounts and some accounts through Credit Suisse Life which he [Mr Ivanishvili] controlled for investment purposes.”
He said that the life insurance division provided power of attorney for policy holders so that they could trade assets for their policy account. The division was only aware of the totals of the various assets held in all client accounts.
Queried about whether he could ask to see the individual accounts, Mr Coffey said: “I have no way of checking what shares are in what accounts.
“You are the CEO,” Mr Smouha said. “What do you mean you have no way of checking?” He added: “You ask the bank to tell you who held the accounts?”
Mr Coffey said the investments were controlled by the bank and the client made the investments with the relationship manager. “Normally, in a bank, confidentiality is big,” he said.
Chief Justice Hargun interjected with his own question: “But you are the account holder?”
“Yes, I could make a request for details of what is on,” Mr Coffey said.
“The account is in your name?” Mr Hargun asked.
“Yes, sir,” Mr Coffey said.
“The confidentiality belongs to you.
“I mean, did you think about getting information from the bank when you realised there was wrongdoing in the accounts in the name of Ivanishvili?”
“No,” Mr Coffey said. “I did not.”
At its height, CS Life had 13,000 clients and more than $15.3 billion in clients’ assets. It had started to offer its life insurance product in 2005, he said.
Daniele Celia, head of Credit Suisse’s life and pensions subsidiaries, had given evidence on Monday and continued it yesterday morning.
He described an automatic monitoring system that would trigger an alert if there was a change of value of plus or minus 5 per cent in a given account. “Then you would look to see if that change of value could be explained by an inflow or outflow of a cash,” he said, explaining that there were a lot of surrenders taking place at that time because clients were being encouraged to move out of unit-linked insurance structures — as the bank had decided they would stop offering the product to their clients — and move their existing clients out of them.
Mr Coffey said that the alert system did not, however, check for fraud. “It was only used for that purpose, not for any other movements in the accounts.
“We could only check to see if there was a surrender or an additional payment,” he said.
Mr Smouha, while questioning Mr Coffey, also told the court about a series of e-mails that showed concern about the amount of Raptor shares being bought. One read, in part: “ … no further investments in this company are allowed until pre-approved by CS Life.”
The lawyer asked: “Did you know about this? But this is specifically seeking to impose on the relationship manager restrictions of investments that would require pre-approval of CS Life and would therefore engage CS Life in the authorising process?”
Mr Coffey responded: “That is what I understand.”
In fact, further e-mails showed Lescaudron did not act promptly to reduce the Raptor exposure. He excused the lapse by telling the in-house compliance employees that he had misunderstood and would comply.
Mr Smouha said that efforts to stop Lescauldron from buying the stock failed, that the Raptor purchases continued and position in the stock continued to grow.
To which Mr Coffey replied: “Yes, sir.”
The case continues this morning.
An earlier version of this story incorrectly identified Thomas Coffey as Jeff Smolley and has been amended.