By Joseph Checkler And Patrick Fitzgerald
Old emails may be coming back to haunt Credit Suisse over
real-estate deals done before the financial crisis.
The emails, which were turned over to firms suing the bank but
haven't been made public, include discussions of an appraisal
method Credit Suisse used to value a dozen luxury properties such
as golf communities and ski resorts during the mid-2000s.
In the emails, reviewed by The Wall Street Journal, Credit
Suisse employees discuss an effort by the bank to use an uncommon
appraisal method known as "total net value" that relied on future
expected revenue, rather than more traditional methods based on how
the market values properties.
A trial that began this week in Dallas is the latest test of
whether the bank can be held liable for heavy losses incurred by
investors in loans that were made based on the appraisals. The
hedge-fund company Highland Capital Management, an investor in the
loans, sued Credit Suisse in July 2013, alleging the bank
improperly inflated the value of the properties.
The loans in question ended up going sour during the financial
crisis, leaving investors like Highland with steeper losses than
they would have faced had the appraisals been more conservative,
Highland alleges. Credit Suisse collected its customary fee from
the new deals, while holding little or no risk when the loans
eventually failed.
"We created a better, unique version of asset value resulting in
a significantly larger valuation than initially expected," said
Grant Little, then a Credit Suisse employee, in a 2004 email to
colleagues congratulating them on one deal, reviewed by the
Journal.
Attempts to reach Mr. Little were unsuccessful.
"This is an unfounded attempt by a sophisticated investor to
misuse the legal system to recover losses," Credit Suisse spokesman
Drew Benson said in a statement. "Credit Suisse will vigorously
defend itself in court."
The bank has denied the loans were improper and courts have said
that they weren't illegal.
The deals worked like this: Credit Suisse marketed the loans to
owners of master-planned communities--mixed residential golf
communities such as Nevada's Lake Las Vegas and ski communities
such as Montana's Yellowstone Club, Utah's Promontory Club and
Idaho's Tamarack Resort. The owners could pocket a chunk of the
proceeds as a dividend or a loan.
The bank would then arrange financing for the loans from nonbank
sources, such as private-equity firms, hedge funds and debt-fund
managers. In return, the lenders would get exposure to a growing
market for high-end real estate. The bank served as the middleman,
collecting tens of millions in fees from the transactions.
The emails seen by the Journal praise the "creativity" of David
Miller, who would later go on to lead Credit Suisse's
leveraged-finance group. He is now the bank's co-head of global
credit.
"He's now pushing the real-estate bankers to roll this out to
other homebuilders," Mr. Little said of Mr. Miller in an email
after the Lake Las Vegas deal was completed. Mr. Miller declined to
comment through a Credit Suisse spokesman.
Investors have sued the bank for loading up the resorts with
debt, and a federal judge once expressed shock over what the judge
described as Credit Suisse's focus on fees rather than the
properties themselves.
Eventually, each of the 12 properties valued by the new method
collapsed into bankruptcy or were forced to restructure, resulting
in hundreds of millions of dollars in losses for investors. Credit
Suisse ended up buying many of the properties at discounted rates
after they collapsed.
The emails show that Credit Suisse, working with an outside
appraiser, used the new method for the Lake Las Vegas loan. Lake
Las Vegas was valued at around $450 million using a traditional
method, but $1.1 billion using the total net value method,
according to the emails. The Credit Suisse loan allowed Lake Las
Vegas's backers--billionaire brothers Sid and Lee Bass and the late
developer Ron Boeddeker--to take $470 million out of the project in
2004, according to court filings.
Lawyers for the Basses didn't respond to requests for
comment.
In turn, Credit Suisse earned $9 million in fees when the deal
closed. Soon after, employees emailed one another saying they could
use the same strategy with other high-end properties.
In one email, a colleague asks Mr. Miller, "Where are you guys
finding all this crap. You must have the biggest and deepest dredge
known to man kind."
Mr. Miller responded, "I will go wherever I can find a fee,"
according to the emails.
The emails also purport to show Credit Suisse contacting a
Cushman & Wakefield employee, who agreed to use the total net
value appraisal method after bank employees explained it to
him.
"While C&W does not typically comment on pending litigation,
the appraisals performed by C&W subsidiaries for Credit Suisse
were appropriate and complied with applicable laws and standards,"
a Cushman spokesman said in an emailed statement.
The fallout from the loans still resounds across the West. In
Idaho, a group of property owners is pursuing a multibillion dollar
lawsuit against the Swiss investment bank over allegedly inflated
appraisals. In Nevada, the Bass brothers and Mr. Boeddeker's heirs
recently settled a bankruptcy trustee's $470 million lawsuit for
$115 million. And Yellowstone ex-owner Tim Blixseth, who earlier
this year was hit with a $219 million judgment from a federal judge
in California for diverting the bulk of a Credit Suisse loan for
his personal use, continues to spar with a bankruptcy trustee in
Montana over the club's collapse.
Philip Stillman, a lawyer for Mr. Blixseth, said in an email
that his client "strongly disagrees with the judgment in the
bankruptcy court, and strongly disagrees with the $219 million
judgment." Mr. Blixseth is appealing the decision.
Cushman & Wakefield settled with Lake Las Vegas investor
Highland last year for $12 million, according to a confidential
settlement reviewed by the Journal. CBRE Inc., which conducted a
second appraisal connected to a 2007 refinancing of the project,
settled a $250 million investor lawsuit last year for $21 million,
according to confidential documents viewed by the Journal. Neither
appraiser admitted liability as part of the settlements.
Write to Joseph Checkler at joseph.checkler@wsj.com and Patrick
Fitzgerald at patrick.fitzgerald@wsj.com
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