Wednesday, June 21, 2006

CIBC & Global Crossing Related Lawsuits

The Globe and Mail, Sinclair Stewart, 21 June 2006

Canadian Imperial Bank of Commerce, which is facing a $2-billion (U.S.) insider trading lawsuit from the trustee for Global Crossing Ltd., has agreed to settle a separate class-action lawsuit filed by the telecommunication company's investors.

CIBC confirmed Wednesday that it struck the agreement during the second quarter, but declined to provide financial terms, other than to say the amount would not have a material impact on the bank.

Based on CIBC's size, and the threshold for disclosing material deals, the settlement is thought to be in the range of $20-million, sources said.

That is a far cry from the massive sum being sought by Global Crossing's trustee, which filed its suit against the bank and dozens of related companies late Tuesday, and is trying to recoup money for creditors who got burned when Global Crossing lurched into bankruptcy protection in 2002.

The trustee alleges CIBC and others knew the fibre-optics company was in trouble when they sold billions of dollars worth of its stock.

In a statement Wednesday, CIBC flatly denied the allegations, and said the action was almost identical to a claim filed by the trustee against the bank two years ago. CIBC sought to have these prior claims dismissed in January, and the motion is pending.

“CIBC vigorously denies these allegations and continues to believe it has strong legal and factual defences against these claims,” the statement said.

Andrew Entwhistle, the lawyer representing the Global Crossing estate, did not return calls seeking comment.

CIBC, through its merchant bank, was an early-stage investor in Global Crossing. It acquired a 38-per-cent stake in the company in 1996 for $38-million, a stake which was worth almost $1-billion when the company launched a public offering a year and a half later.

The creditor-related suit claims that the bank and several affiliated companies, most of which were owned by former CIBC employees, made approximately $2-billion selling shares in Global Crossing. Five of these former employees also sat on Global Crossing's board of directors, and the suit alleges they “knew of the misstatements of Global's revenues, assets and obligations.”

If recent history is any precedent, CIBC investors may find some solace in the fact the bank has agreed to settle the Global Crossing class-action suit. CIBC's well-documented entanglements with Enron Corp. cost the bank $2.65-billion (U.S.) in settlements last summer — more than 10 per cent of its current market value — and dealt a nasty blow to the bank's reputation.

But with Enron, it was the class-action litigation that inflicted by far the most pain: a record $2.4-billion settlement to resolve allegations CIBC abetted the pervasive accounting scandal at the energy trader. The bank's settlement with Enron itself was just $250-million.
The Globe and Mail, Sinclair Stewart, 21 June 2006

The Canadian Imperial Bank of Commerce denied allegations Wednesday that it and dozens of its affiliates participated in a “multiyear scheme” to profit from the sale of shares in telecommunications company Global Crossing Ltd.

The insider-trading allegations, contained in a $2-billion (U.S.) lawsuit filed in court yesterday, could represent yet another black eye for CIBC, which is trying to turn the page on what has been a bruising few years.

The country's fifth-largest bank paid $2.4-billion last summer to settle a class-action suit by investors at Enron Corp., and before that paid $125-million to settle its alleged involvement in a U.S. mutual-fund trading scandal.

In a statement early Wednesday, CIBC said yesterday's action is essentially identical to claims filed against the bank in 2004, which the bank moved to dismiss in January. That motion is pending. Yesterday's claims do, however, now include additional CIBC affiliates and other third-party defendants.

“The action contains no new claims against CIBC,” the bank said. “CIBC vigorously denies these allegations and continues to believe it has strong legal and factual defences against these claims.”

Yesterday's legal salvo, filed by a trustee representing Global Crossing creditors, claims that CIBC and several related companies engaged in insider trading of the fibre-optics company's shares. The suit contends CIBC and others made roughly $2-billion in profit from this trading, even though they allegedly knew Global Crossing was in poor financial health. Many of these related companies were controlled by former CIBC executives.

“While the defendants were making a fortune from insider trading because the company's financial statements were manipulated to appear robust, in truth many of Global's operations were struggling and the company was at all relevant times insolvent,” alleged the suit, filed in a New York bankruptcy court.

It claimed that a handful of CIBC employees, who were appointed to Global Crossing's board of directors, “knew of the misstatements of Global's revenues, assets and obligations,” and that these misstatements eventually helped push the company into bankruptcy in 2002.

A CIBC spokesman declined to comment on the matter yesterday.

Global Crossing was an undisputed cash cow for CIBC, and heralded as the bank's single most successful merchant-banking victory. In late 1996, the bank paid $38-million for a 38-per-cent stake in the upstart fibre-optics carrier; less than 1½ years later, when the company launched its initial public offering, the bank's stake was worth nearly $1-billion.

A group of junk-bond executives who worked for CIBC in the United States, and who had previously worked with Global Crossing's founder, jump-started the bank's involvement. Five of these executives served on Global Crossing's board, but the last of them retired in 2000, when CIBC sold $710-million worth of its stock. The suit claims the bank wanted to divest its position “anonymously,” so it would not alert other investors that Global Crossing's main underwriter was “dumping stock.”

The CIBC executives who sat on Global Crossing's board “acted together with others to repeatedly violate their fiduciary duties of loyalty to Global,” the suit said.

CIBC helped take Global Crossing public, and over the years it received $58.7-million from the company from investment banking and advisory fees, according to the suit.

Global Crossing emerged from bankruptcy protection in 2003. The trustee says creditors still have more than $6-billion in outstanding claims.