Richard Desmond, chairman of the Northern & Shell Plc media group, sued a Credit Suisse Group AG (CSGN) unit for selling him a 50 million-pound ($78.5 million) derivative deal he said was inappropriately risky and impossible to understand.
“It was incomprehensible except to an expert in complex derivative transactions,” according to legal papers filed by Desmond in July and made available this week. The transaction, set up in 2007, was linked to a GLG Partners Inc. fund of hedge funds and included an interest-rate swap.
Desmond -- whose Northern & Shell group includes the Daily Express newspaper, OK! Magazine and adult channel Television X - - sued Credit Suisse for misrepresentation, breaching financial regulations and breach of duty. He wants the deal declared invalid, or damages equal to the cost of unwinding it -- about 18.7 million pounds.
Bank customers from British fish shops to Indian property companies have sued in the U.K. over interest-rate swaps they say they didn’t need or understand. The U.K. Financial Services Authority said in June it had agreed with banks including Barclays Plc (BARC) and HSBC Holdings Plc (HSBA) to set up a compensation program to pay back small businesses that were sold unsuitable products.
“It appears to be yet another case of a bank confusing ‘high net worth’ with ‘sophisticated,’” said Max Hotham, a lawyer at London-based Enyo Law who specializes in improper security sales cases against banks.
“Individuals were seduced to enter into increasingly exotic products on the basis of selective sales literature, which didn’t alert the recipient as to their maximum potential exposure,” Hotham said.
Desmond put about a quarter of his 200 million-pound fortune into the transaction, according to his court filings. He was given a misleading impression of potential returns and told the only risk was that the counterparty went bankrupt.
The deal couldn’t be unwound in 2008 because of an “asset disruption” event, leaving Desmond making payments under the swap. It was “unsuitable and/or inappropriately risky for Mr. Desmond,” according to the filings.
GLG employee Andrew Thatcher first approached Desmond with the transaction in 2007. The media mogul was never told what the underlying investment was, according to his filing. It was “in effect a combination of a 50 million-pound synthetic loan and a synthetic investment.”
David Waller, a spokesman for Man Group Plc (EMG), which bought GLG in 2010, said Thatcher had left the firm. He declined to comment on the Desmond suit.
Interest-rate swaps are contracts that convert floating- rate debt into fixed-rate debt, or vice versa. They became unprofitable for many customers when rates fell to record lows after the 2008 financial crash.
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