Japanese investors plan to sue MUFG unit over Credit Suisse bonds

Japanese investors are planning to file lawsuits against Japan-based brokerages including Mitsubishi UFJ Morgan Stanley Securities over their sale of so-called AT1 bonds issued by Credit Suisse, Nikkei Asia has learned, opening a new front in the global legal battle over the investments.

Taiju Yamazaki, a former Bank of America Securities lawyer, said he expected that his first action would be filing a group suit in Tokyo on behalf of Mitsubishi UFJ Morgan Stanley Securities clients seeking to claw back losses on their Credit Suisse additional tier-1 bonds.

He said he had received queries from 60 people who bought bonds with a total nominal value of $44 million from the subsidiary of Mitsubishi UFJ Financial Group (MUFG) and expected more than half to join the prospective action. The lawsuit will be filed, at the earliest, in August, he said, adding that he expected to file additional suits against other brokerages in Japan that sold the AT1 bonds.

Mitsubishi UFJ Morgan Stanley declined to comment on the matter, telling Nikkei Asia it does not comment on specific cases.

Japan's Financial Services Agency has ordered Mitsubishi UFJ Morgan Stanley to report on its sale of AT1 bonds and its responses to the losses, Nikkei learned in May. The company has said that it was reviewing all its Credit Suisse AT1 transactions and that the process was ongoing.

More than $1 billion of Credit Suisse AT1 bonds were sold to Japanese investors, according to the Japanese government. Of those, more than $700 million were sold by Mitsubishi UFJ Morgan Stanley to 1,550 clients -- 1,300 of them individual investors. The AT1 bonds were wiped out after the Swiss authorities intervened to rescue the bank on March 19, arranging its sale to rival UBS.

AT1s were created after the 2008 financial crisis to help enhance bank capital buffers without issuing new shares and diluting existing investors. In a crisis, they were designed to convert into equity and absorb losses before a lender's conventional bonds were hit. The Credit Suisse rescue proved controversial because holders of its AT1 bonds were wiped out as part of the deal, while investors in its equity were not -- upsetting the conventional wisdom that a company's shares would lose value before its bonds.

Sales documents used by Mitsubishi UFJ Morgan Stanley noted the possibility that the AT1s could be wiped out in a "viability event," such as the bank receiving extraordinary government support to remain solvent.

During an earnings call on April 28, Shinjiro Yamamoto, a senior executive of Mitsubishi UFJ Morgan Stanley, said the risks of the AT1 bonds were explained to clients using the "sales documents in accordance with regulations." He also said the company was in contact with buyers of the securities.

Because of the "viability event" warnings, some lawyers in Japan believe it would be difficult to make a case against the company and are pursuing other avenues for redress. Japanese law firm Masuda & Partners decided on May 10 to file a claim against the Swiss government on behalf of investors in collaboration with a Singaporean law firm. Law firms in other countries also have filed suits against the Swiss banking regulator in Switzerland.

However, Yamazaki said his lawsuit would make the argument that a lack of clear explanation about the viability clause by the brokerage's sales agents was the norm, rather than the exception. Under Japanese law, sales agents are required to explain important matters such as a risk of a loss of principal "in a manner and to the extent necessary for the customer to understand it" or face potential damages.

Some Japanese investors interviewed by Nikkei Asia said they lost a major portion of their retirement savings by buying Credit Suisse AT1 bonds, which were sold in minimum increments of $200,000.

One investor, a university athletics coach, said he told his broker he wanted to invest in low-risk bonds. Others said they believed they were investing in standard subordinated bank debt because the yields they received were just about 1 percentage point higher than bank securities they had bought earlier.

A 71-year-old investor in Tokyo said she bought Credit Suisse AT1 bonds in 2019, with a face value of $300,000 and a coupon interest rate of 6.25 per cent. She said her investment in JPMorgan Chase preferred shares -- which pay a fixed dividend, in this case 5 per cent -- had just matured and she was happy to put the money into a similar JPMorgan instrument until her private banker at Mitsubishi UFJ Morgan Stanley recommended Credit Suisse AT1 bonds. Issued in 2014 and trading at 105 cents to the dollar at the time, the bonds offered a slightly better yield than JPMorgan preferred shares.

She said she noticed the viability clause in the sales document and asked about it. The private banker replied that it was like an insurance policy mentioning the risk of a catastrophic event and that it should not be a major concern, she said.

The banker told her that the AT1 bonds were like the JPMorgan preferred shares she had bought before, she said. "Credit Suisse is one of the world's largest banks," she said she was told. "If Credit Suisse were to go under, so would MUFG."

Rival Japanese brokers sold relatively few, if any, Credit Suisse AT1 bonds to retail investors. Nomura sold none, for instance, with its chief financial officer, Takumi Kitamura, saying, "We thought they were too risky for retail investors."

The private banking unit that sold the AT1 bonds to the Tokyo investor was integrated into the company in 2020. The unit traces its origin to now-defunct Yamaichi Securities, whose retail operations were taken over by Merrill Lynch in 1998 and then sold to MUFG in 2012.

The integration came as Mitsubishi UFJ Morgan Stanley launched a major initiative around 2020 to modernize its wealth management operations through a closer partnership with Morgan Stanley, a top global wealth manager.

Mitsubishi UFJ Morgan Stanley, which has been selling AT1 bonds since 2017, is owned 60 per cent by MUFG and 40 per cent by Morgan Stanley.

The Tokyo investor said she was introduced to Mitsubishi UFJ Morgan Stanley by MUFG, a bank her father had worked with as a business owner. She had a bank account with MUFG and purchased life insurance policies and investment trusts from the company.

After buying the Credit Suisse AT1 bonds, she said she received no update on the investment for around four years, even as the price of her bond fell from 105 cents on the dollar into the 70s. The private banker made occasional visits, but the conversations focused on selling new products.

Two or three days before the Credit Suisse sale, she said the banker informed her that there were "concerns" about AT1 bonds, which had plunged from around 70 cents to 35 cents on March 15. She said that was the first time she had heard the term "AT1." When the bonds were wiped out, she said she lost half of her assets with Mitsubishi UFJ Morgan Stanley.