A federal judge rejected Credit Suisse Group Inc's CSGN.VX bid to dismiss a lawsuit by National Century Financial Enterprises bondholders that accused the Swiss bank of deceiving them about the health care finance company and missing its vast, roughly $2.9 billion fraud.
U.S. District Judge James Graham in Columbus, Ohio said the bondholders, who held nearly $2 billion of National Century debt, "have submitted sufficient evidence in support of their fraud-based claims" to allow the lawsuit to proceed.
While dismissing part of the case, the judge also rejected Credit Suisse's request to dismiss several groups of bondholder claims, including some raised by Lloyds TSB Bank Plc (48IY.L), MetLife Inc (MET.N) and Allianz SE's (ALVG.DE) Pimco unit.
"This ruling is important because it holds that an investment bank may be held liable for statements made in an issuer's offering documents," said Kathy Patrick, a lawyer who represents about two dozen of the bondholders including Pimco, Germany's BayernLB (BLGGgi.F) and Mutual of Omaha, in an interview.
Patrick said considerably more than half of the bondholder claims remain in the lawsuit. She expects the case to be sent to an Arizona federal court for a trial later this year.
Credit Suisse in a statement said it will continue its defense, and "remains confident that a jury will find based on all the evidence that it should not be held responsible for assisting or committing any wrongdoing."
Founded in 1990, privately held National Century provided financing to hundreds of clinics, hospitals and other services providers, and buying accounts receivable from such providers by using money obtained from the sale of notes to investors.
But according to the Justice Department, the Dublin, Ohio-based company misused investors' money, funneled corporate funds to company officials including co-founder and Chief Executive Lance Poulsen, and covered up its fraud by lying to investors and credit rating agencies.
National Century filed for bankruptcy protection in November 2002. A federal jury convicted Poulsen in October 2008 of fraud, and he was sentenced five months later to 30 years in prison. Co-founders and Vice Chairmen Rebecca Parrett and Donald Ayers were sentenced to a respective 25 years and 15 years in prison.
The bondholders claimed that Credit Suisse sold National Century notes even though it knew or should have known about the company's fraud, and relied on offering materials that did not describe how National Century actually operated.
Graham did not rule on the merits of the case. Nonetheless, despite calling the noteholders "sophisticated investors," he found that "a sufficient disparity in access and knowledge existed to make the noteholders' reliance on Credit Suisse justifiable."
The case is In re: National Century Financial Enterprises Inc Investment Litigation, U.S. District Court, Southern District of Ohio, No. 03-01565.
(Reporting By Jonathan Stempel; Editing by Bernard Orr)