Nineteen former executives and directors of Credit Suisse have agreed to a $115 million settlement to resolve shareholder claims that their risk management failures led to significant losses in 2020 and 2021, including those tied to Archegos Capital Management.
The losses were cited as contributing factors in its buyout by UBS, another Swiss banking giant, back in 2023. UBS acquired Credit Suisse through a government-facilitated rescue.
The preliminary settlement was approved by Justice Andrea Masley in a New York state court in Manhattan. Under the agreement, insurers for the defendants will pay the settlement amount, after deducting legal fees, to UBS.
Among the defendants is former Credit Suisse Chairman Urs Rohner. That said, all individuals involved denied any wrongdoing as part of the settlement.
In high-profile cases like Credit Suisse’s, D&O policies are structured to cover legal defense costs and settlements arising from alleged executive mismanagement.
Shareholders, led by the Employees Retirement System for the City of Providence, Rhode Island, alleged that the defendants’ negligence violated Swiss law and left Credit Suisse exposed to losses when counterparties such as Archegos, Greensill Capital Management, and Malachite Capital Management defaulted.
Attorneys for the shareholders plan to seek up to 30% of the settlement fund for legal fees, in addition to up to $3.2 million for expenses.
Credit Suisse’s exposure to Archegos Capital Management resulted in losses of approximately $5.5 billion after Archegos collapsed in March 2021. The fallout led to job losses, resignations, regulatory actions, and reputational damage for the bank.
The family office once managed $36 billion, but collapsed after founder Bill Hwang failed to meet margin calls on loans used to make large investments in media and technology stocks. Hwang is currently appealing his July 2024 fraud conviction and 18-year prison sentence.
Other financial institutions, including Nomura, Goldman Sachs, UBS, and Morgan Stanley, also had exposure to Archegos, but their risk management systems allowed for more timely responses, limiting their losses compared to Credit Suisse.
The Paul Weiss Report, commissioned by Credit Suisse, revealed that the bank made just $17.5 million in fees from Archegos in 2019, despite having exposure to a potential $20 billion loss at the peak of Archegos’ activities. This discrepancy highlighted the imbalance between risk and reward in the bank’s dealings with the family office.
The settlement follows a series of legal actions related to Credit Suisse’s collapse. In July, a federal judge in Manhattan ruled that UBS must face two lawsuits filed by former Credit Suisse shareholders and bondholders. These plaintiffs allege that Credit Suisse made false and misleading statements about its financial condition.
However, the same judge dismissed a separate lawsuit in February 2024, which targeted 29 former Credit Suisse officials and auditor KPMG, and attributed the bank’s failure to two decades of “continuous mismanagement.”
The Credit Suisse settlement underscores the growing risks and costs for D&O insurers covering financial institutions.
Major payouts from executive mismanagement have led to higher premiums and stricter underwriting, with insurers now demanding greater transparency around governance and risk controls.
While D&O insurance is crucial for attracting and protecting board members, it can also create a moral hazard if directors rely too heavily on insurance to shield them from the consequences of poor oversight.
In response, insurers are increasingly tying coverage terms to demonstrable improvements in governance – such as independent boards and robust risk assessments. This evolution positions D&O insurance not just as a financial backstop, but as a lever for promoting stronger governance and risk culture.
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