HOUSTON, March 20, 2009 – In a sweeping decision issued two days ago, the Honorable James Graham of the U.S. District Court for the Southern District of Ohio denied in virtually every respect motions to dismiss the claims filed against Credit Suisse by a litigation trust created in the bankruptcy arising out of the collapse of former asset-backed securities issuer National Century Financial Enterprises (NCFE).  The litigation trust, the Unencumbered Assets Trust (UAT), is represented by Gibbs & Bruns LLP.

In light of the current financial crisis, the Court’s ruling on Credit Suisse’s motion to dismiss is highly significant in that it directly addresses and rejects many of the arguments that have been employed in the past to bar claims by trustees of bankrupt entities against investment banks and financial advisors.

In its opinion, the Court rejected Credit Suisse’s argument that fraudulent conduct on the part of former officers of a company must always bar a bankruptcy trustee from recovering damages from third parties who participated in the fraud (commonly referred to as the doctrine of in pari delicto).  The Court noted that the existence of structural limits and controls typically found in securitization transactions could prevent application of this doctrine.  The Court also ruled that application of the in pari delicto doctrine is not automatic where the defendant asserting the defense is alleged to have participated in the conspiracy.  With respect to Credit Suisse, the Court noted:

According to the complaint, the fraud could never have been pulled off without Credit Suisse’s involvement.  It was allegedly Credit Suisse that the Founders enlisted to help misappropriate money from NPF VI and NPF XII [the NCFE securitization vehicles].  In Credit Suisse, the Founders had a partner who allegedly agreed to accept substantial investment banking fees in exchange for keeping quiet while assets of their principal were looted, and who further helped conceal the fraud by contributing its own funds to prop up NPF VI’s and NPF XII’s reserves.  And whenever the scheme needed more cash flow, it was Credit Suisse who is alleged to have knowingly issued more notes.  It was Credit Suisse’s expertise, reputation, and presence as a leading global investment bank that allegedly won the trust of institutional investors who would place millions, sometimes hundreds of millions, of dollars in NPF VI and NPF XII notes.  The complaint describes a condemning picture of Credit Suisse’s participation, knowledge, and motivation regarding the alleged scheme to defraud and regarding the injury to NPF VI and NPF XII.

Second, the court rejected Credit Suisse’s assertion that NCFE’s fraud injured only the noteholders who purchased fraudulent notes, and therefore, the bankruptcy trust lacked standing to bring suit.  In rejecting this claim, the Court noted that the bankrupt company was injured by the “looting” of the company by its defalcating officers and that it therefore has standing to recover the looted assets, both from those who looted them and from those who assisted in the looting.

Lead counsel for the UAT, Kathy Patrick of Gibbs & Bruns, said that her client feels vindicated by the Court’s opinion.  “Our client is very pleased that the Court has rejected Credit Suisse’s efforts to avoid responsibility for its actions by relying on technicalities.  The securities laws require sellers of securities to tell the truth and investment banks and financial advisers to serve their clients faithfully.  This opinion confirms that this is a serious lawsuit, with serious claims, and we look forward to presenting these claims to a jury.”

Background: NCFE was the largest issuer of medical accounts receivable asset-backed securities in the United States before it collapsed in bankruptcy in November 2002 amid allegations of widespread fraud and misappropriation of assets.  To date, ten senior executives of the company have been convicted or pleaded guilty to federal charges of conspiracy, securities fraud, wire fraud, and money laundering arising out of the NCFE securitization program.


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