Credit Suisse Ordered To Pay $287.5m Over Flawed Appraisal

[Terrel L. Shields]

Meanwhile C&W is facing over $10 billion in class action lawsuits.

They don't have to lose a case and still be bankrupted. How much do you think they made vs. how much do you think they are out in legal costs. The E & Os probably run backward from them.

 

[kiritf]

They are in some serious sh(t. I need to read some more detailed articles on it, but I'm confused at why C&W would be in trouble unless they just didn't say what they were doing in the appraisal and what they were being asked to do was on an engagement. I mean, everybody on here uses EA's and HC's pretty consistently I'd imagine. In the case as it's described, I would have definitely added some type of verbage and disclaimer all over the place that the value not being discounted has no real merit to lending (worded much better than that). It's essentially irrelevant. If someone asked me to provide the number of the series of cash flows and reversion with no discounting, I'd do it. I'd just describe what it is and that it only means that that what the value is with no discounting. What deal?

 

[TD Morgan]

Clearly what they developed is not a "discounted" cash flow model per se, but simply a summation of undiscounted cash flows. I assume they did not define it properly as such (with any amount of explanatory verbiage), or they would probably not be in hot water.

While I have not seen their DCF, the mere fact that they used one implies a few things. The first, and most important, is that they applied a risk-adjusted cost of capital. While that might mean many things to different people, setting a discount rate at zero is erroneous, no matter how you look at it.

But for anyone to consider their value indication as being reliable for any use whatsoever is laughable. Even a (totally) risk-free cost of capital is something other than zero for any long term period. If they used a zero discount rate for the reversion, they are even more misleading.

You said yourself that the results would be irrelevant. I am guessing that they were presented in such a way that they could have been relied upon. (I am sure there were other errors in judgement in their analysis as well.)

If you find more details, please post the information here, as I am interested in finding out what happened, too.

They are in some serious sh(t. I need to read some more detailed articles on it, but I'm confused at why C&W would be in trouble unless they just didn't say what they were doing in the appraisal and what they were being asked to do was on an engagement. I mean, everybody on here uses EA's and HC's pretty consistently I'd imagine. In the case as it's described, I would have definitely added some type of verbage and disclaimer all over the place that the value not being discounted has no real merit to lending (worded much better than that). It's essentially irrelevant. If someone asked me to provide the number of the series of cash flows and reversion with no discounting, I'd do it. I'd just describe what it is and that it only means that that what the value is with no discounting. What deal?

 

[kiritf]

Yeah, I'm going to kill some time this morning and do some reading of the longer articles. I'm pretty intrigued. I'll post whatever I find. I'd love to see the appraisal.

There is something seriously fishy to ask for a value premise that has ZERO discounting.

 

[Michael S]

I'm curious if they also presented a market value as well. I.e. did the report say market value is $20 million but using this other methodology as requested the by the client, the value is $250 million.

 

[PL1957]

Clearly what they developed is not a "discounted" cash flow model per se, but simply a summation of undiscounted cash flows. I assume they did not define it properly as such (with any amount of explanatory verbiage), or they would probably not be in hot water.

They defined it just fine with all the needed assumptions. As with most lawsuits, it arose from an unintended user and just snowballed. As noted, it's knocked around a bunch of courts. To the best of my knowledge, this is the first one with any kind of judgement - and the judgement was against CS, not C&W. Also, as far as I know, CS, the intended user, hasn't sued C&W.

 

[TD Morgan]

They defined it just fine with all the needed assumptions. As with most lawsuits, it arose from an unintended user and just snowballed. As noted, it's knocked around a bunch of courts. To the best of my knowledge, this is the first one with any kind of judgement - and the judgement was against CS, not C&W. Also, as far as I know, CS, the intended user, hasn't sued C&W.

Any idea why they wanted a gross cash flow analysis?

I have completed subdivision analyses where I have summed the total revenues from lot sales, so perhaps they wanted to know what the gross (undiscounted) cash flows might be going forward?

 

[PL1957]

Any idea why they wanted a gross cash flow analysis?

Clients often ask for funny things. Hypothetical "go dark" values on buildings long-term leased to credit tenants, values assuming continued occupancy for a specific use, values assuming hypothetical sale-leaseback ... Often these values are used for some internal underwriting purpose. As long as they are properly labeled/presented, there's nothing inherently misleading in providing them.

 

[Junior Member]

They defined it just fine with all the needed assumptions. As with most lawsuits, it arose from an unintended user and just snowballed. As noted, it's knocked around a bunch of courts. To the best of my knowledge, this is the first one with any kind of judgement - and the judgement was against CS, not C&W. Also, as far as I know, CS, the intended user, hasn't sued C&W.

It wasn't that firm that actually rendered the specific appraisal most directly relating to the $287 million judgment against Credit Suisse in Texas state court. The appraiser who did the Lake Las Vegas appraisals, and who is now deceased, left that firm for another firm and then delivered new appraisals based on the same methodologies shortly after arriving at the new firm. Both the old and new firms were sued by Highland Capital's investment entity. The firms settled those cases for significant sums. The appraiser's old firm paid a $12 million settlement; this settlement also settled some claims by investors in other projects. The appraiser's new firm paid $21 million. Credit Suisse gambled and went to trial and did much worse. Portions of the settlements paid by the appraisal firms were deducted in figuring Credit Suisse's monetary liability to Highland Capital's investment entity. (These facts are all part of the court's public record.)

 

[PL1957]

It wasn't that firm that actually rendered the specific appraisal most directly relating to the $287 million judgment against Credit Suisse in Texas state court. The appraiser who did the Lake Las Vegas appraisals, and who is now deceased, left that firm for another firm and then delivered new appraisals based on the same methodologies shortly after arriving at the new firm. Both the old and new firms were sued by Highland Capital's investment entity. The firms settled those cases for significant sums. The appraiser's old firm paid a $12 million settlement; this settlement also settled some claims by investors in other projects. The appraiser's new firm paid $21 million. Credit Suisse gambled and went to trial and did much worse. Portions of the settlements paid by the appraisal firms were deducted in figuring Credit Suisse's monetary liability to Highland Capital's investment entity. (These facts are all part of the court's public record.)

It's tough to defend an appraisal when signatories are dead ...