Highland Seeks $250 Million From Credit Suisse in Trial

Credit Suisse AG used an inflated appraisal to steer Highland Capital Management LP into the refinancing of a shaky real-estate development, a lawyer for the Dallas-based debt manager said at a trial seeking more than $250 million lost when the borrowers defaulted.

Highland’s Claymore Holdings LLC is trying to recoup what it lost from investing in Lake Las Vegas, a 3,592-acre residential and resort community that filed for bankruptcy in 2008, by asking a Texas jury to find the Zurich-based bank engaged in fraud to boost its own fees.

“The appraisal was bad and this case is about Credit Suisse’s involvement,” William Reid, a Highland attorney, told a jury in state court in Dallas today in his opening statement. The ultimate sale price of the property was so low that it couldn’t “be explained by market loss or anything else other than fraud,” he said.

The 2013 lawsuit mirrors one brought by two other Highland entities against Credit Suisse in state court in Manhattan that claimed the bank marketed loans for the Yellowstone Club in Montana and other developments based on fraudulent appraisals. That suit, which was seeking more than $350 million, was rejected by the New York court.

Credit Suisse has denied any wrongdoing in connection with Lake Las Vegas. The investment went sour because of the recession, the bank’s lawyers contend.

‘Blame Everyone’

“Highland is going to blame everyone as they search for a scapegoat for an investment that just didn’t work out,” David Lender, a lawyer for Credit Suisse, told the jury.

The jury of 10 women and two men will hear only Highland’s claim of fraudulent inducement. State District Judge Dale Tillery hasn’t ruled yet on whether he’ll allow additional Highland claims, including one for breach of contract. Those claims, if permitted, will be tried later.

Credit Suisse used a flawed appraisal that inflated the value of collateral backing the financing for Lake Las Vegas, Reid, the Highland lawyer, told jurors. Credit Suisse executives worked with an outside appraiser to increase the amount, he said.

Reid showed the jury e-mails from Credit Suisse executives over several days in April 2007 when the appraiser’s valuation of the property increased from $522 million to $891 million. The lower amount didn’t support the loan while the upper amount did, Reid said.

$20 Million Fees

The property used for collateral for a $540 million loan eventually sold for $17 million, Reid said. Credit Suisse made $20 million in fees by underwriting loans to the project in 2004 and 2007, he said.

“That is simply crazy,” Reid told the jurors. “The property was sold for less than their fees.”

The lenders weren’t shown “all the things behind the black curtain,” Reid said. If Credit Suisse bankers revealed the truth, “they don’t make a fee,” he said.

Credit Suisse in 2004 “introduced a new syndicated loan product” that allowed real estate developers “to take out large, non-recourse loans based on the purported value of their entire development projects and immediately distribute a substantial portion of the loan proceeds to themselves as dividends,” Highland said in an Aug. 2 filing.

Dividend Loans

The bank sold more than $3 billion of such dividend recapitalization loans to the corporate bond market, “all of which eventually soured and either went into bankruptcy or restructuring,” Highland said in the filing.

Highland is a sophisticated investor that first put money into Lake Las Vegas in 2004 and increased its stake until it became the largest investor in 2006, Lender, the bank’s lawyer, told jurors today.

Highland was seeking to gain control of the project by becoming the majority lender, he said. In the 2007 financing, “Highland went all-in on this investment,” Lender said.

James Dondero, co-founder of Highland, “loved real estate” in 2007, Lender said. His firm’s funds had $5.5 billion invested in real estate at the time, he said.

After lending $250 million, Highland gained the control it sought by forcing the project into technical default, Lender said. “The bet Highland made didn’t work out” when the 2008 financial crisis hit and devastated real estate, he said.

Former Executive

Credit Suisse lawyers said in a Nov. 25 pretrial hearing they intend to call a former Highland executive, Patrick Daugherty, who will testify that nobody at Highland ever read the appraisal and that the firm didn’t trust appraisals from third parties.

None of the Highland executives questioned before trial had read the appraisal, Lender said. Details in the appraisal were fully disclosed, he told the jurors. “So anyone who actually read the appraisal would know all about them.”

In the New York case that Highland brought against Credit Suisse, state Supreme Court Justice Charles Ramos granted a request to dismiss all but one of the claims in July. He threw out the remaining count in October.

Reid said during a pretrial hearing that the investment firm is seeking at least $250 million in damages, which is the amount the Highland entities lost in the 2007 refinancing.

Credit Suisse lawyers argued that proceeds of the 2007 refinancing allowed other Highland funds to cash out of $168 million previously invested in the project, so the actual damages should be $82 million.

Separate Entities

The funds are separate legal entities, even if they are all managed by Highland Capital, Reid argued at the hearing. Tillery barred Credit Suisse’s expert witness from testifying that the $250 million loss to one group of Highland funds was offset by the $168 million payment to the other group.

Bankruptcy-related proceedings in Nevada have led to recovery of other lender losses from the project, according to court papers. Larry Lattig, the bankruptcy trustee, sued the developers in 2010 for $470 million that they cashed out in a 2004 financing, which was also arranged by Credit Suisse.

Texas billionaires Sid and Lee Bass, and the estate of Ron Boeddeker, a California developer who died in 2010, agreed in October to pay a total of $115 million to settle the case, according to a copy of the agreement.

Lake Las Vegas, in Henderson, Nevada, is 17 miles (27 kilometers) east of the Las Vegas Strip, and centered around a 320-acre manmade lake, according to its website. The resort includes hotels, golf courses, a shopping village and luxury home developments. Among recent investors in the area is Paulson & Co., the hedge fund run by billionaire John Paulson, which bought 875 acres in the resort in 2012.

The case is Claymore Holdings LLC v. Credit Suisse AG, 13-07858, District Court, Dallas County, Texas.

(An earlier version of this story corrected a witness’s name.)

(Corrects Paulson’s first name in next-to-last paragraph of story published yesterday.)
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