Hedge-fund firm Highland Capital Management has won a $40 million verdict in a lawsuit alleging Credit Suisse used an inflated appraisal to dupe it into backing a $540 million refinancing loan for a Nevada resort development.
Highland contributed $250 million to the dividend recapitalization loan for the Lake Las Vegas project, a 3,592-acre residential and resort community that filed for bankruptcy in 2008. It sued Credit Suisse in July 2013 for fraudulent inducement, claiming the bank pressured an appraiser to inflate the value of the property to as much as $891 million so it could earn $7 million in fees.
After a two-week trial, a Dallas jury last week found Credit Suisse 65% liable for Highland’s losses, limiting the judgment against the bank to $26 million. The appraisal firm and the development company, who were not defendants in the trial, were found liable for the remaining 35%.
“We’re pleased with the jury verdict and $40 million award for the investors who were victimized by Credit Suisse’s intentional fraud,” Highland’s general counsel Scott Ellington said in a statement. “For years there has been a distinct lack of appetite for going after Wall Street banks like Credit Suisse for these kinds of misdeeds.”
In a dividend recapitalization loan, or “dividend recap,” a company incurs new debt to pay a dividend to private shareholders. Credit Suisse began pitching dividend recapitalization loans to resort developers in 2004, according to court papers. In 2007, Reuters reports, it tried to refinance the Lake Las Vegas loan, which had run into trouble as the development failed to meet projections.
Highland said it lost almost its entire investment when the property sold for just $17 million after Lake Las Vegas went bankrupt. “We were tricked. We were duped. We were misled,” a Highland attorney told jurors.
Credit Suisse argued that the hedge fund went into the refinancing with “eyes wide open” and was trying to blame the bank for a bet made “before one of the worst economic downturns ever seen.”
“We are highly confident that, after applying proportionate responsibility and applicable credits, [the] jury verdict will result in Credit Suisse paying no damages in this case,” a spokesman for the bank said.