Credit Agricole SA, France’s third-largest bank, was sued for fraud in New York by investors alleging the lender tricked them into buying $70.5 million worth of collateralized debt obligations that were designed to fail.
Loreley Financing claimed in the lawsuit filed Oct. 22 in New York State Supreme Court that Credit Agricole’s Calyon unit allowed a hedge fund to pick low-quality assets for three CDOs the fund could then bet against.
“Calyon defrauded plaintiffs during both the construction and the dismantling of its business strategy,” the investors said in the lawsuit. Calyon let the hedge fund “select weak and poor quality collateral for at least two of the CDOs in which plaintiffs invested.”
The investors were advised by German lender IKB Deutsche Industriebank AG, which was sued by Credit Agricole in London in July 2009 over an agreement that forced the Paris-based bank to buy structured securities from an IKB investment vehicle during the credit crisis. IKB almost collapsed before being bailed out in 2007.
“IKB communicated to Calyon that the Loreley companies had a low appetite for credit risk and no appetite for principal loss,” according to the lawsuit.
The Loreley suit “is clearly related to our U.K. $1.675 billion high court 2009 lawsuit against IKB for fraud,” Credit Agricole said in an e-mailed statement. “We are confident this counter-action by IKB is without merit.”
CDOs are pools of assets such as mortgage bonds packaged into new securities. Interest payments on the underlying bonds or loans are used to pay investors.
The lawsuit was previously reported in the Financial Times.
The case is 650673/2010, Loreley Financing v. Credit Agricole Corporate and Investment Bank, Supreme Court of the State of New York.