By Dario Item

Credit Suisse AT1 bondholders have filed more than 300 appeals (involving more than 3,000 appellants) with the Swiss Federal Administrative Court. On March 11 of this year, FINMA filed a partial response to one of these appeals.

Antigua.news has received an exclusive copy of the document, which is published in full below. Upon reviewing the memorandum, it has been found that some parts of the content are surprising.

Swiss Financial Market Supervisory Authority’s (FINMA) handling of the appeal process is criticizable. FINMA is acting more like a private entity being sued than a public authority funded with taxpayers’ money. FINMA is adopting dilatory strategies, raising specious exceptions, and taking a tenacious and obstinate attitude that is questionable at best. Its behavior is inconsistent with its role as a public authority, which should behave in a fair and transparent manner, seek the truth, and apply the law correctly. Instead, FINMA appears to be focused on winning at all costs, rather than upholding canons of justice. These concerns raise questions about the impartiality and transparency of FINMA’s decision-making process, and its ability to serve the public interest.

New request for an extension of time to submit comments

FINMA takes only a partial position on the appeal by requesting an extension until April 30, 2024, to submit a more detailed response.

FINMA justifies its request by saying, essentially, that it is not ready with its Italian-speaking staff, to translate responses from German to Italian:

” …To date, FINMA has forwarded about a hundred reply memorandums, all in German, while appeals in the Italian and French-language procedures had not yet been forwarded to it for comment. The submission of reply memorandumsials  in the Italian language now requires significant additional translation and coordination work as well as the involvement of Italian-speaking staff hitherto little involved in the appeals procedures related to the write-down of the AT1 instruments of Credit Suisse Group AG (hereafter: CSG). ” (The translation from Italian to English of all the paragraphs quoted in this article was done by Antigua.news)

It is important to note that appeals were filed against the March 19, 2023 decision to write-down the AT1s almost a year ago in all official Swiss languages (German, French and Italian), depending on the geographic origin of the investors or the law firms representing them, including those residing abroad. The deadline for filing an appeal against FINMA’s March 19 decision was the same for all, which was 30 days. FINMA has been aware of this situation for a considerable period of time, during which it could have organized its staff to deal with this need. The request for an extension seems to be an attempt to stall for time and is therefore specious.

On the other hand, it is unfortunate to note that the Swiss Federal Administrative Court has yet to notify the first plaintiffs of FINMA’s or UBS’s (previously CS) full response. This is surprising as almost a year has passed, and investors are eagerly waiting to know why they have lost their savings. The counterparties’ complete defense arguments have been a mystery for too long.

FINMA disputes that AT1 bond holders have standing to appeal the write-down decision

According to FINMA, the write-down of AT1s would constitute a so-called protective measure under Article 26 of the Banking Act, and AT1 bondholders would not have a right of appeal, which is why they would also not have a right of access to the files.

Specifically, FINMA states that:

“The AT1 decision is a protective measure according to Article 26 of the Banking Act. According to Art. 37g ter para. 1 Banking Act, creditors and owners of a bank cannot appeal against such measures. This exclusion of the right to appeal applies to holders of AT1 instruments, such as the appellant.”

Several appellants have raised their objections to FINMA’s argument, which they believe is merely a smokescreen. They argue that the protective measures outlined in Article 26 of the Banking Act are not related to a write-down of AT1s, and none of the measures mentioned in this article involves a state-ordered loss of investor claims. In case investors suffer any loss due to an authority’s action, they should be granted the right to appeal.

The Swiss Federal Administrative Court and the Swiss Supreme Court have already recognized in the past (BVGer decisions B-1092/2009 of January 5, 2010, § 6.4.2; B-5644/2012 of November 4, 2014, § 1.4; BVGer B-6065/2015 of June 5, 2016, § 1.2.4 and DTF 142 II 451, § 3.4.1) that the restriction of the right of appeal cannot be opposed to a third party whose legally protected interests are affected. The only decisive and sufficient condition for recognizing a right to appeal is that the third-party appellant has a special, noteworthy, and close relationship to the subject matter of the contested decision and that he or she may derive a practical benefit from any annulment or modification of the contested decision. The appellant’s deserving interest consists in the circumstance of avoiding a disadvantage (material or immaterial) that the contested decision would entail. And it is more than evident that such conditions exist in the case of AT1 investors.

But FINMA goes further, and goes so far as to add that:

“The loss claimed by the plaintiff does not result directly from the AT1 decision, but from the write-down made by CSG under the applicable contractual bases. The loss that the plaintiff claims to have suffered is therefore only indirectly related to the AT1 decision. The appellant  is therefore neither particularly affected by the AT1 decision under Article 48(1)(b) of the Federal Administrative Procedure Act, nor does he have an interest worthy of protection in its annulment or modification under Article 48(1)(c) PA. Therefore, he has no right to appeal under the general rules of administrative procedure.”

FINMA is manifestly out of focus when it denies standing to appeal to the AT1 bondholders on the grounds that its decision is directed solely to CSG and that the loss suffered by investors due to the write-down of the AT1s is therefore only indirectly related to its order issued to CSG.

FINMA overlooks that its March 19, 2023, decision contained an absolutely peremptory order to CSG, namely, to execute the write-down of the AT1s. In other words, CSG had no leeway. Moreover, CSG did not write-down the AT1s on the basis of the contractual clauses contained in the prospectus, but rather in execution of FINMA’s peremptory decision. Indeed, as already seen, CSG had even pointed out to FINMA that there was no contractual basis to write-down these instruments. FINMA’s order thus knowingly intended to cause a loss to the AT1 bondholders, who are causally and particularly affected by the decision. FINMA therefore shamelessly denies the evidence and only attempts to evade its responsibilities by blaming others and trying to escape judicial scrutiny.

FINMA changes strategy and now opposes showing the files to the appellant

Whereas in the first appeals filed with the Swiss Federal Administrative Court, FINMA had not opposed access to the files requested by the plaintiffs (ironically, only CS was opposed to this), now the Swiss regulator seems to have changed strategy by strenuously opposing showing the files.

First and foremost, FINMA argues that it has an overriding interest in maintaining the secrecy of the documents so as not to permanently undermine the trust placed in it by the financial institutions under its supervision:

“In the present case, the transmission of confidential procedural documents (AT1 and CCA) to the plaintiff could permanently undermine the confidence of those subject to FINMA in the confidentiality of the information they share with FINMA and thus seriously undermine FINMA’s supervisory activities. This risk appears even more concrete in the present case, considering that the claimant is under no obligation of confidentiality and that the information on the write-down of AT1 instruments attracts a great deal of media interest. Hence, if the claimant were to be granted access to the files, there would be a risk of incontrolled dissemination of these files to the public.

Given the repercussions that an access to the files would have on FINMA’s supervisory activities, FINMA’s public interest in secrecy is, in the present case, preponderant (…)“

It appears that FINMA is overlooking the fact that the credibility of not only the Swiss regulator itself, but also the Swiss financial marketplace as a reliable international partner governed by the rule of law, is at stake. This follows the write-down of more than 16 billion CHF of AT1 bonds, which was likely done in the absence of any contractual basis. The enormous loss incurred in the situation, the highest ever recorded in AT1, suggests that there is an overwhelming investor interest in a full and transparent judicial review of all actions committed by FINMA.

But perhaps the most surprising aspect in FINMA’s defensive arguments is that according to the Swiss financial watchdog there would be a danger that the documents would be handed over to the media and be used to initiate lawsuits against the Swiss Confederation and CSG in countries where the rule of law does not apply. Moreover, with completely incomprehensible arguments, FINMA fears the risk that decisions will be taken ex aequo et bono in arbitration proceedings.

“It may be considered a well-known fact that numerous AT1 creditors have appealed the AT1 decision for the sole purpose of obtaining access to information that could be used in civil and arbitration proceedings in Switzerland or abroad against the Swiss Confederation or the bank. In this context, the risk of lawsuits being filed in countries where respect for the principles of a rule of law are questionable should be noted. It is also possible that so-called “judgments ex aequo et bono” may be issued in arbitration proceedings. Already in the article published in the NZZ of May 13, 2023, attorneys for plaintiffs had stated, in essence, that the fact that the Swiss Federal Administrative Court had forwarded to them FINMA’s decision of March 19, 2023 would help them assert their position in civil proceedings. In the same article, the NZZ stated that it was likewise in possession of the March 19, 2023, decision. It can therefore be assumed that the other acts would also reach the media just as quickly if they were made accessible to the plaintiff. This would greatly increase the risk of uncontrolled circulation of the procedural documents and that these documents would be used against the Swiss Confederation or the bank in arbitration and civil proceedings, circumventing the procedural rules applicable to civil proceedings. In view of the fact that the potential litigation value totals approximately 16.5 billion francs, FINMA believes it is imperative to prevent acts of FINMA from being made accessible to thousands of potential plaintiffs before a final decision has been made on their standing to appeal the AT1 decision.”

Regarding arbitration proceedings, it should be immediately brought to the attention of FINMA that Switzerland is a party to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States. Art. 42 of that international agreement provides, unless the parties agree otherwise, for the application of the law of the contracting state (in casu Swiss law). In contrast, Art. 42 para. 3 permits ex aequo et bono to be decided only if the parties so agree (“The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree.”). The risks evoked by FINMA on this point therefore appear entirely insubstantial.

As for, on the other hand, the danger of lawsuits being filed in legally unreliable countries, it is a well-known fact, to use FINMA’s expression, that the main country involved in actions of a certain size against CSG or the Swiss Confederation is the United States, followed by the United Kingdom. Arbitration requests have also been announced in China, Japan, Korea, Singapore and the UAE. Even this argument by FINMA (which, incidentally, has administrative cooperation agreements in place with all these countries) is not lacking in insipidity. Above all, FINMA sins with arrogance in assuming that the rule of law does not apply in other countries. At the very least, Switzerland has certainly not proven to be a more law-abiding state in comparison with other countries that are taking steps to protect investors’ rights.

Perhaps it is worth going over some of the facts likely to cast doubt on whether the Swiss authorities were transparent and respectful of the rule of law in their handling of the Credit Suisse AT1 case.

In this regard, maybe FINMA should first be reminded that during the press conference on March 19, 2023 it, along with all the other co-participants, did not even show that modicum of institutional dignity to frankly announce, even in the face of explicit questions from the journalists in the room, that the price of the CS-UBS merger, about which the Swiss government at that event so strutted, would be the write-down of more than CHF 16 billion of AT1s bonds. Price of course paid not by UBS or the Swiss Government, but exclusively by investors.

It’s also worth noting that FINMA has yet to provide a clear explanation, with the necessary transparency (and intellectual honesty) expected of a public institution, regarding which contractual clauses in the prospectus could have allowed the write-down of the AT1s. This has been the case for over a year now. Indeed, FINMA continues to shy away from such an exercise, while esteemed legal and financial experts have already ruled out that, in the case of CSG, there was any contractual room for maneuvering to write-down the AT1s (see, for example, JPMorgan’s March 21, 2023 report by Roberto Henriques and Drishti Sharma). What’s more, as we learned from the March 22, 2023 decision (a document that emerged by chance during the first access to files granted by the Swiss Federal Administrative Court, confirming how important it is for investors to be able to have access to all files), CSG also objected to FINMA for the absence of a contractual basis to write-down the AT1s.

It is equally important to remind FINMA that neither it nor the Swiss Government has justified to investors why UBS’s offer was preferred over the one made by Saudi National Bank. According to the WSJ, the latter offered much more than UBS (USD 5 billion compared to 3 offered by UBS), and also provided for the full bailout of the AT1 bondholders.

It would also be appropriate to remind FINMA that its statements made to the press before CSG’s collapse are in open contrast to what was contained in the March 19, 2023 decision. And that Credit Suisse’s top management also made likely false statements to the press (for which at least one class action lawsuit has been filed in the United States) which affected the markets and probably influenced the choice of many investors to maintain their investment in AT1s despite the negative forecasts of financial analysts. How could FINMA have allowed these lies?

And finally, what rule of law is a state that adopts emergency legislation (new Art. 5a LiqH-NVO) with retroactive effect (!) to expropriate investors of their savings without paying any compensation?

In addition to all this, and perhaps before anything else, FINMA should be reminded that Switzerland has signed the European Convention on Human Rights, a convention that, among other things, guarantees a fair trial. A principle also reiterated in the Swiss Constitution and other domestic procedural laws, including administrative law. Now, someone will have to explain to investors how a proceeding in which the plaintiffs are to be denied access to precisely those essential documents and information that determined FINMA in making the decision to wipe out the savings of AT1 investors can be considered fair. In the face of all these failures on the part of the Swiss Confederation, would FINMA really want us to believe that there is a questionable rule of law in other countries? Look who’s talking!

FINMA-11-3-2024