Aug. 7 (Bloomberg) -- Credit Suisse Group, Switzerland's second-biggest bank, was sued by Swiss semiconductor company STMicroelectronics NV for allegedly placing $450 million of the chipmaker's cash into unauthorized auction-rate securities.

STMicroelectronics said Credit Suisse disregarded instructions to invest in student-loan securities guaranteed by the U.S. government, refused to return the money when asked, and threatened to make ``the process painful and embarrassing'' if sued, according to a complaint filed Aug. 6 in federal court in Brooklyn, New York.

Credit Suisse Group had ``an intentional strategy'' of reducing its exposure to auction-rate securities by late 2006 and accomplished its goal by ``dumping into accounts of unsuspecting clients some of the worst ARS on the market,'' STMicroelectronics said in the complaint, which followed a February arbitration claim.

``While the ARS market did not `freeze' until February 2008, the auctions for every single security in ST's account had failed six months earlier,'' the semiconductor company said, referring to the flight of buyers from the market.

Credit Suisse spokesman David Walker called the lawsuit ``meritless'' and declined to comment further.

The bank said last month it was helping U.S. prosecutors probing two of its brokers who resigned after engaging in ``prohibited activity'' related to selling auction-rate debt.

`Fraudulent E-Mails'

Working on ST's account were ``at least seven Credit Suisse Securities brokers and directors who sent or were copied on one of more of the nearly 200 fraudulent e-mails falsely or misleadingly describing the investments,'' STMicroelectronics said in the complaint.

The federal investigation doesn't target Credit Suisse, the bank has said.

Citigroup Inc., the biggest underwriter of auction-rate securities, agreed today to buy back or help clients unload $19.5 billion of the investments as part of a settlement with state and federal regulators. The New York-based bank also will pay a $100 million fine to settle allegations that it improperly sold untradeable bonds.

As part of the accord with New York State Attorney General Andrew Cuomo, the U.S. Securities and Exchange Commission and a group of states led by Texas, Citigroup agreed to buy back about $7.5 billion in securities from individual customers, charities and small businesses. It also pledged to start giving ``liquidity'' to $12 billion held by institutions.

Auction-Rate

Auction-rate securities are bonds or preferred shares whose interest rates are reset by periodic bidding run by dealers. Firms including Citigroup abandoned their routine role as buyers of last resort for the debt in mid-February as demand dried up, allowing the market to collapse and leaving investors stuck with what had been pitched to them as money-market-like instruments.

STMicroelectronics, Europe's largest chipmaker, alleged in its complaint that its funds were wrongly invested in auction- rate securities of collateralized debt obligations and credit- linked notes, some backed by subprime real estate loans. Zurich- based Credit Suisse's alleged actions were intended to shift the danger of losses away from the bank, STMicroelectronics said in its complaint.

The Geneva-based chipmaker said in an Aug. 4 SEC filing that it seeks to recover ``all losses in our account.'' STMicroelectronics said in the complaint that ``at least a dozen'' other companies were victims of a $2 billion scheme ``carried out by the same group of brokers and directors at Credit Suisse Securities.''

Two Other Companies

At least two other companies are attempting to recover losses related to auction-rate securities from Credit Suisse.

Biovail Corp., Canada's largest publicly traded drugmaker, said in an SEC filing May 12 that it had started arbitration proceedings against Credit Suisse over auction-rate securities and was seeking $26.8 million in compensatory damages and $53.6 million in punitive damages.

Credit Suisse ``fraudulently or negligently and in breach of the parties' customer agreement'' invested its assets in auction-rates securities, which weren't among its approved investments, Biovail alleged in the filing.

Copa Holdings SA, a Panama City, Panama-based airline, also filed a complaint against the Swiss bank, according to records kept by the Financial Industry Regulatory Authority, known as FINRA, a private industry regulator.

STMicroelectronics said in its SEC filing that it is also a plaintiff in an action against directors of Credit Suisse in Lugano, Switzerland. That case, started in April by the public prosecutor, might help the company recover additional money, it said.

Credit Suisse fell 0.75 francs to 54.85 francs in Swiss trading.

The case is STMicroelectronics NV v. Credit Suisse Group, 08-03201, U.S. District Court for the Eastern District of New York (Brooklyn).

To contact the reporter on this story: Lindsay Fortado in Brooklyn, New York, at lfortado@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net.

Last Updated: August 7, 2008 17:15 EDT