Supreme Court on a Knife Edge

Highland Capital v Credit Suisse

Around a half billion dollars hang on an abstruse quirk. It will be another test for the legitimacy and repute of the country’s courts, already seriously damaged in public opinion.

The Texas Supreme Court has discretion to decide on a legal quirk with massive consequences, both for the litigants, and for the country.

The public is desperate that a senior court shows it stands for real justice – and not “politics”.

If state supreme courts go the way of SCOTUS, a polarized public could lose faith, predisposing the country to civil disorder and inability to cope with the next crisis.

The Texas Supreme Court will shortly decide Credit Suisse v Highland Capital fund Claymore Holdings. Only around $212 million is directly at stake, but parallel litigation in New York (Allenby etc) takes the total consideration to just short of a billion dollars.

The legal question is an abstruse quirk without clear statutory guidance. It is on a knife-edge despite the facts having been determined at trial.

The money either goes to a huge criminal bank which helped cause the financial crisis (with other banks) and sabotaged the tax system – or to an honest investment fund.

URGENT: Amici Curiae Desperately Needed

The justice issues are crystal clear.

The trial found that the bank had committed fraud. It had engineered a fake / fraudulent / non-existent appraisal to justify a corrupt loan which inevitably collapsed. The deceit was stunningly similar to its fake appraisals which contributed to the financial crisis.

The bank claims it should pay nothing – because its disclaimers permitted such fraud, although it concedes that the contract required a legitimate appraisal. This discussion will assume that the bank loses this argument (it is not certain).

The main argument is whether the bank should pay around $40 million or around $212 million.

The decision could go down to the whim and mood of the justices – so amici curiae are desperately needed.

I have the background and the main filings, so contact me if you are interested.

Legalese or Legal Sleaze? 

The bank is appealing the $212 million award of rescissory damages. These can only be granted if “damages cannot be determined with reasonable certainty or precision.” Technically, a judge can order that a contract be rescinded to bring the parties back to where they were initially, and award damages. These are rescissory damages.

The judge and the appeals court ruled rescissory damages were appropriate.

The bank claimed the opposite, and that $40 million is most it should pay.

The case is being tried under New York state law and Texas procedure in Austin.

There is an excellent RICO statute (triple damages) under New York law with helpful provisions for out of state parties.

Highland could claim RICO damages in parallel to rescissory damages, just in case it loses the main argument. The justification: the facts of the matter were fraudulently concealed by the bank and only adequately exposed recently at trial.

The above description is a simplification which should not be relied upon absent independent research. The main filings are here.

Extracts from the Trial Judgement:

40. In response to Prawer’s email, Credit Suisse banker Dana Klein exclaimed: “This appraisal does not work! How could it go from 750 to 522???? At this level we don’t have a deal we can sell.” Klein explained this exchange in his June 30, 2014 deposition by stating, “my assumption would be that if I—if he had an appraisal at 750 million versus a loan of 540, that that was an acceptable loan value for syndicated—syndicating a new deal. And that if the 750 was reduced to 522 million, that against a 540 loan value we could not sell a deal.” (See, e.g., PX129; June 30, 2014 Depo. Tr. of Dana Klein at 271:21-272:7.)

44. In the early morning hours of April 22, 2007, Credit Suisse investment banker Arik Prawer emailed his team and asked them to assemble in the office for a pre-call “strategy” meeting three hours before the call with Acton. Prawer expressed his concern: “Sun will be key day—very uncertain about how appraisal cony will go and impact on our deal—Can we caucus at the office on Sunday at my office at 11 am—we need to strategize nad [sic] fig out a plan here.” (PX28.)

45. During this same time period, the Borrowers were scrambling to analyze Acton’s new DCF value as well. In the late night hours of Saturday, April 21, 2007, and continuing until the next day, the Borrowers engaged in an email discussion whereby Terry Hodder, the Borrowers’ tax director, proposed using an approach that did not discount the values back to the valuation date of March 31, 2007, but instead to a later point in time, which would have the effect of increasing value. Cox and David Voorhies, another Lake Las Vegas finance executive, responded to Hodder, “I like your answers…” and asked “Is T. Hodder Assoc’s a nationally recognized appraisal firm we could use?” Acton ultimately adopted this idea in the Appraisal. (See, e.g., PX3; PX300.)

46. Shortly before the April 22 call, Acton “reran the numbers as requested” and circulated further adjusted numbers that raised the NPV of the Development to $440.6 million with no View Premiums and $521.4 million with View Premiums on unsold land only. This estimate, and all estimates before the April 22 call, discounted the value of the Development’s cash flows back to January 1, 2007. (See, e.g., PX29.)

47. At least five Credit Suisse representatives, the Borrowers, and Acton were invited to attend the April 22 call. At trial, every Credit Suisse and Borrower participant on the April 22 call testified (Acton is deceased) either live or by deposition. The Credit Suisse bankers (the entire investment banking team led by Prawer and Adam Searles of Capital Markets) and David Cox, the CFO of the Borrower, claimed to be unable to recall even a single detail about the call or what was discussed. In fact, Prawer testified that notwithstanding all of the contemporaneous emails demonstrating his attendance and the importance of the appraisal and the urgency of their work during that weekend, “I am not even sure I attended the call.” (See, e.g., PX20; June 3, 2015 Afternoon Trial Tr. at 130:12-23.) Having evaluated the demeanor and body language of the witnesses during their testimony, the Court finds the testimony of the Credit Suisse and Borrower witnesses collective inability to recall what was discussed on the telephone call is not credible.

48. Regardless of the consistent inability of the Credit Suisse bankers and Borrower representatives to recall any details from that April 20-22, 2007 weekend, the contemporaneous emails and DCF drafts demonstrate that Acton was asked to make several material changes to his “independent” valuation. Within hours of the April 22 call, Acton sent Credit Suisse “revised DCF calculations with no views and some views” using the “adjusted dcf period” suggested by Credit Suisse and the Borrowers, and stated that he would “discuss lot & golf absorption with LLV officials Monday AM.” As a result of this one change to the discounting methodology, the NPV for the no View Premiums scenario increased from $440.6 million before the call to $512.1 million after the call, and the NPV for the unsold View Premiums scenario increased from $521.4 million before the call to $605.9 million after the call. (See, e.g., PX 30.)

49. When forwarding Acton’s revised analysis to other members of the Credit Suisse team, Kao explained that it “reflects change to the discounting method as discussed on the call. This does not account for moving sales up to earlier periods, which he will provide tomorrow.” Jenkin likewise noted in an email to the Borrowers that Acton “has adjusted the discounting formula as requested. We are still waiting for a final version incorporating the sales timing changes that were discussed.” (See, e.g., PX3 1; PX33.)

50. …… And by their own admission, Credit Suisse knew it was “wrong” to discount the cash flows back to January 1, 2008 for a valuation as of March 31, 2007.

51. Credit Suisse knowingly chose not to correct the discounting error in the Appraisal. Credit Suisse knew that fixing the error would materially reduce the appraised value of the Development. On April 24, 2007, Kao explicitly instructed Jenkin: “Use Acton’s numbers (we’re going to maintain ignorance on the NPV analysis be his is higher than ours).” The documents show and the Credit Suisse investment bankers admitted that they obtained Acton’s DCF spreadsheets and “checked the math” and knew how he had performed his discounting before they posted the appraisal. Accordingly, I find that Credit Suisse knowingly chose to provide the lenders in the Refinancing with an Appraisal that had a material discounting mistake of between $54 million to $94 million.

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