Stichting Vestia Groep, a Dutch affordable-housing provider that nearly collapsed as a result of losses on derivatives, asked a London court to void 700 hundred million euros ($924 million) in interest-rate swaps after it was sued by Credit Suisse Group AG.
Credit Suisse should have known that the derivatives were inappropriate trades conducted by a Vestia employee who breached his duties to the company, Vestia said in court documents. The organization said the former treasurer was arrested by Dutch police as part of an investigation into swaps transactions.
“Each disputed transaction failed to hedge Vestia’s legitimate exposure,” Vestia said in a December court filing in London that was released last month.
Complex interest-rate derivatives that caused losses for customers have turned into legal battles for the banks that sold them. In Italy, prosecutors are probing Banca Monte dei Paschi di Siena SpA’s use of derivatives to hide losses, and more than a half a dozen Italian municipalities are embroiled in London lawsuits over the financial products.
“One can draw parallels with ill-advised transactions by Italian local governments” said Michael Dempster, founder of the University of Cambridge’s Centre for Financial Research. “It starts with attempting to reduce costs and ends with a derivative that blows up.”
Vestia agreed to pay 2 billion euros to reach a settlement with nine other banks in June 2012 after the organization froze margin call payments on its 22 billion-euro notional portfolio of money-losing derivatives. Credit Suisse refused to settle and sued Vestia for 83 million euros in November in London. A trial is scheduled for next year.
Adam Bradbery, a spokesman for Credit Suisse in London and Vestia spokesman Ronald Florisson declined to comment beyond the court filings.
Vestia says that all but two of its transactions with Credit Suisse should be voided because they violated Vestia’s statutes and were unsuitable as hedges.
The deals, which had a total notional amount of 850 million euros and maturities of up to 50 years, were negotiated on Vestia’s behalf by the company’s former treasurer Marcel de Vries. The transactions were signed by Erik Staal, Vestia’s former chief executive officer and chairman, Credit Suisse said in a court filing.
De Vries, who left Vestia in April 2012, was arrested by Dutch prosecutors in relation to derivatives transactions at the company, Vestia said in court documents. Staal, who isn’t under investigation, resigned from Vestia in June 2012.
“Each of Mr. de Vries and Mr. Staal breached his duties to Vestia,” the housing provider said in its court filing.
Ed van Liere, a lawyer at Wladimiroff Advocaten NV in The Hague who represents de Vries, declined to comment. Staal’s lawyer, Jurjen Lemstra, said his client isn’t a defendant in any lawsuit and isn’t a suspect in criminal probes.
Credit Suisse said in a separate Feb. 1 court filing that it didn’t “believe there was any wrongdoing involved in any of the transactions.” The bank refused to join the other nine counterparties in settling with Vestia “because it did not consider that it would serve either its financial or reputational interests.”
Vestia, which reported holding derivatives with a face value of 22 billion euros in February 2012, started buying the swaps from Credit Suisse in November 2010, according to a filing by Credit Suisse. Three of the transactions involved Credit Suisse paying Vestia above-market rate coupons of between 4.75 percent and 5 percent for a period of three years, according to the documents. Euro swap rates at all maturities have been below 3 percent since September 2011.
The purpose of the transactions was to offset high interest payments that Vestia was making on fixed-rate loans, Credit Suisse said in its court filing. After 2015, the coupons paid by Credit Suisse would be computed according to a formula linked to constant-maturity swap rates that likely would pay below-market rates until maturity, according to calculations by Bloomberg.
Vestia also sold four derivatives to Credit Suisse in which it received upfront payments while making a bet that long-term interest rates wouldn’t decline.
The strategy fell apart in June 2012 because falling interest rates resulted in the mark-to-market loss on the contracts breaching 100 million euros, according to Credit Suisse calculations, triggering a collateral call that Vestia refused to pay.
Vestia disputed Credit Suisse’s calculations, responding in its Dec. 21 filing that because the contracts had a negative value of no greater than 88 million euros at the time, the threshold wasn’t breached. Vestia’s contracts with Credit Suisse had a negative value of 115 million euros on June 1 according to a review of court documents by Bloomberg LP’s BVAL derivatives valuation unit.
Credit Suisse said in its court filing that the contracts should be honored because Vestia officials were sophisticated enough to understand the transactions, signed waivers and used third-party products to price them. Vestia demonstrated its familiarity with the derivatives by disclosing that it used complex interest-rate products such as CMS structures, cancellable swaps and knock-in collars in its 2009 and 2010 accounts, Credit Suisse said. Knock-in collars are interest-rate derivatives that protect against high and low interest rates, contingent on rates breaching a predetermined barrier.
The case is Credit Suisse International v. Stichting Vestia Groep, High Court of Justice, Queen’s Bench Division (London).