CIBC Class Action on Failure to Disclose US$11.5 Billion of US Subprime Mortgage Exposure
CIBC Class Action is about CIBC and four of its executives failing to disclose on a timely basis the bank's US$11.5 billion exposure (116% of the bank's common equity) to US subprime mortgages within structured credit vehicles and derivatives during the Class Period of May 31, 2007 to Feb. 28, 2008. Between 2007-Q3 and 2009-Q3, CIBC took US$9.1 billion of writedowns on its US subprime mortgage related portfolios. These were actual losses and not simply marked-to-market losses that subsequently recovered post the financial crisis. The damages sought for the misrepresentations are between $2 billion to $4 billion, which are described as "not unrealistic" in the June 10, 2016 J. Strathy decision. Over the Class Period, CIBC's share price declined from $106 to $67, reducing its market capitalization by $10 billion.
The Class Action was first filed on July 22, 2008; amended on Jan. 11, 2010; would have been certified by the Ontario Superior Court of Justice on July 3, 2012 on its prospective merit, but dismissed due to failure to meet the limitation period defined in the recent Court of Appeal of Ontario Sharma v. Timminco Ltd. decision on Feb. 16, 2012; certified by the Court of Appeal of Ontario on Feb. 3, 2014 in a rare reversal of its own prior Sharma v. Timminco Ltd. decision on limitation period governing class actions on liability for secondary market disclosure under S. 138.3 of the Ontario Securities Act; certified by the Supreme Court of Canada on Dec. 4, 2015; subject to an Ontario Superior Court of Justice $2.7 million cost award against CIBC on June 10, 2016; and the Class Action hearing is scheduled for Sept. 2018, over 10 years after its filing.
CIBC's disclosure of its US$1.7 billion residential mortgage backed securities and collateralized debt obligations portfolio on Aug. 13, 2007 and US$9.8 billion hedged credit default swaps portfolio on Dec. 6, 2017, were too late compared to when CIBC executive's had knowledge of these portfolios' highly probable impairment based on developments in the US subprime mortgage market and the financial weakness of its hedging counter-parties. Most importantly, the CIBC had direct knowledge of likely impairments based on evidence within documents they wrote or reviewed, which became available during discovery. See the files below on Internal Documents, Timeline of Key Dates, and Summary of Financial Expert Opinion under the Misrepresentation Class Action Documents below.
The following significant facts were known to CIBC executives:
The CIBC received billions of dollars of margin calls on credit default swaps it bought, and it did not have a corresponding right to call for margin from ACA Limited, with whom the CIBC had sold as a hedge $US 3.5 billion of credit default swaps, until ACA's credit rating was reduced to A-. ACA showed unacceptable leverage when CIBC entered ACA's hedge, and the ACA hedge had already collapsed at the beginning of the Class Period due to deteriorating US subprime mortgages. CIBC was meeting and communicating with ACA executives about their concerns throughout the Spring/Summer of 2007. ACA credit memos and increases in credit limits occurred while executives denied material US subprime mortgage exposure.
CIBC CDS's referred to portfolios of AAA rated upper tranches of CDO's, but these CDO's owned other CDO's (CDO^2) that were predominantly BBB credit rated and with the high potential to become worthless as US subprime mortgages became delinquent. CIBC is an expert in CDO's and CDS's and could not reasonably rely on the A credit rating given to ACA and to the AAA credit ratings given to CDO's referred to within its CDS's.
CIBC could not sell a large CDO deal at April 28, 2007 and other banks had similar unsold inventories during March to July 2007. CIBC CEO Gerry McCaughey told his Board on July 13, 2007 that CIBC could not sell its CDO exposure. Not being able to sell its CDO exposure is certainly a warning that its marked to market value at the time could be zero. This premise also applies to to CDS's referring to CDO^2's with underlying BBB tranches ofCDO's owning US subprime mortgages.