Jim Middlemiss, Financial Post
Published: Wednesday, July 23, 2008
The subprime litigation frenzy in the United States has spilled over the border with the launching of a multi-billion-dollar class-action against CIBC and eight current and former executives over failed investments in U.S. residential mortgages.
Shareholder and proposed lead plaintiff Howard Green, of Thornhill, Ont., alleges that the defendants misrepresented the bank's exposure to subprime investments, engaged in material misrepresentations and failed to make timely disclosures, contrary to securities regulation.
The claim also alleges CIBC failed to conduct proper due diligence or implement appropriate risk-management controls related to billions of dollars in investments in collateralized debt obligations and U.S. subprime mortgages. The period of the alleged misrepresentations covers May 31, 2007 to Dec. 31, 2007.
Named in the suit are: CEO Gerald McCaughey; Tom Woods, at the time the CFO and now chief risk officer, risk management; Brian G. Shaw, a former CEO of CIBC World Markets; Ken Kilgour, at the time chief risk officer, risk management who left CIBC in 2008; Michael Capatides, a lawyer at CIBC; Leslie Rahl, who sits on the board of directors; Phipps Lounsberry who once headed the debt division of World Markets and left in November, 2007; and Steven McGirr, a former chief risk officer who left CIBC in July 2007.
The allegations have yet be proved in a court of law.
CIBC spokesman Rob McLeod said in a statement that "CIBC denies these allegations and plans to vigorously defend this action. CIBC is confident that, at all times, its conduct was appropriate and that its disclosure met applicable requirements."
Mr. Green has retained the Toronto law firm Rochon Genova, co-counsel in a shareholder suit against Nortel that settled for US$2.5-billion.
"My sense is that CIBC went very, very deep into this market," said lawyer Joel Rochon. "The essence of our claim is that they failed to disclose the magnitude and troubling risk profile of these investments."
The lawsuit seeks the maximum statutory damage of $1.75-billion -- 5% of CIBC's market share at the time of the alleged misrepresentations -- for breaching Section 138 of the Ontario Securities Act, which imposes civil liability for misrepresentations in public statements or documents.
The provisions are relatively new and allow shareholders who acquire or sell shares during the time of any misrepresentation to bring an action even if they didn't rely on the utterance when making their investment decision.
It parallels the fraud on the market provisions of U.S. laws and lessens the burden on when bringing such lawsuits.
Alternatively, the claim seeks $10-billion in damages for negligence or $10-billion in damages under shareholder oppression laws.
Subprime litigation against banks is all the rage in the United States. Since last year, about 150 shareholder suits have been launched, said John Coffee, a professor at Columbia Law School in New York. That doesn't include claims by individual investors, which are even greater in number, he said.
"We're seeing an awful lot of large institutions [suing banks]," he said, adding they are often "very sophisticated institutions" who were stuck holding collateralized debt obligations when the credit markets collapsed last year.
The CIBC claim alleges that Mr. McCaughey was appointed after the bank was sued in the Enron scandal to "de-risk" CIBC's investments.
Instead, the lawsuit alleges that CIBC invested in more than $11-billion worth of hedged and unhedged investments related to risky U.S. subprime residential mortgages, which effectively "bet the bank on a single sector."
The claim alleges that despite rapidly declining credit markets, CIBC continued to publicly state it did not face any material writedowns, which artificially inflated the share price. The claim alleges that "throughout the class period, CIBC continuously failed to disclose the true materially impaired value of its mark-to-market assessments of [U.S. subprime residential mortgage investments], with the result that it overvalued its assets in the financial statements and failed to issue earnings warnings when they were warranted."