Credit Suisse auction-rate debt suit may start frenzy

By Duncan Martell

SAN FRANCISCO (Reuters) - Europe's largest computer chip maker STMicroelectronics NV (STM.PA) has sued Credit Suisse (CSGN.VX) for allegedly placing $450 million of its cash into auction-rate securities without authorization, and said a dozen or more companies with billions invested were victimized.

STMicro claimed in its lawsuit that "at least a dozen other multinational corporations are victims of the same scheme carried out by the same group of brokers and directors at Credit Suisse Securities and furthered by Credit Suisse."

STMicro said it believed more than $2 billion of these clients' money ended up invested in auction-rate securities.

"The banks are playing chicken here, thinking that companies like STMicro aren't going to take the steps they did," said Steve Williams, a plaintiffs attorney at law firm Cotchett, Pitre & McCarthy in Burlingame, California. "Banks are going to be very mistaken in that judgment, and I think a lot of big entities are going to start filing these to get their cash out."

He forecast corporations scrambling to make up their losses by piling on in legal attacks against Wall Street banks and accusing bankers of assuring investors that their cash was being placed in conservative investments, not in auction-rate securities. That market froze early this year.

Already, nonfinancial companies such as drugmaker Bristol-Myers Squibb Co (BMY.N), networking gear maker Ciena Corp (CIEN.O), software firm Lawson Software Inc (LWSN.O) and others have cited so-called structured investment vehicles such as asset-backed securities as hitting profits.

Canadian drugmaker Biovail Corp (BVF.TO) said in a May 12 filing with the U.S. Securities and Exchange Commission that it had undertaken arbitration proceedings against Credit Suisse over auction-rate securities. It is seeking $27 million in damages and $54 million in punitive damages.

ST Micro alleges in the August 6 complaint filed in federal court in Brooklyn, New York, that by late 2006 Credit Suisse knew that collateralized debt obligations, especially those linked to subprime loans, were risky investments and began to decrease its exposure to them.

"But Credit Suisse continued to purchase these securities for its clients, and it did so without disclosing its own assessment of the securities to investors, like ST," the chipmaker said in its complaint.

A Bristol-Myers spokesman said on Thursday the company had no comment on any potential litigation it may be considering related to auction-related securities it may have invested in.

STMicro had thought its cash would be invested by Switzerland's second-biggest bank in highly liquid and secure investments, in this case U.S. government-backed student loans, STMicro said.

STMicro claims that Credit Suisse instead bought illiquid, risky and unsuitable auction rate securities consisting of collateralized debt obligations and credit-linked notes, some of which were backed by subprime real estate loans, the chipmaker said in its complaint.

"We do not comment on meritless lawsuits," said Credit Suisse spokesman David Walker in New York.

An STMicro official could not immediately be reached to comment.

Auction-rate debt bears interest rates that reset through periodic auctions typically held every seven, 28 or 35 days. Once thought safe, much of that market has been frozen since Wall Street brokerages stopped supporting the debt.

STMicro's lawsuit comes as Citigroup (C.N) and Merrill Lynch MER.N said they would buy back billions of dollars of illiquid auction-rate securities from retail clients, and Citigroup agreed to pay a $100 million fine to settle charges it fraudulently misled investors about the debt's risk.

The announcements could pave the way for settlements or buybacks by UBS AG (UBSN.VX) and other financial companies whose clients own such debt, following the February meltdown of the $330 billion auction-rate market.

After STMicro discovered its cash had not been invested as it had believed and confronted Credit Suisse about it, "Credit Suisse told ST that if it attempted to force Credit Suisse to return its money through legal proceedings, Credit Suisse would make the process painful and embarrassing for ST," according to the complaint.

STMicro, which has its principal offices in Geneva, said that since August 2007, Credit Suisse has yet to liquidate STMicro's account and "refused to make ST whole."

(Reporting by Duncan Martell, with additional reporting by Dan Wilchins in New York; Editing by Braden Reddall, Phil Berlowitz)