© 2020 Arizent. All rights reserved.

Credit Suisse shed U.S. private bank with eye on reviving it

Register now

Credit Suisse’s declaration a few years ago that it would quit managing money for rich Americans seemed too crazy to be true: Why would the bank get out of the world’s biggest wealth management market at the very time its new boss was betting its future on that business?

Now, a newly disclosed cache of documents is providing fresh insights into the decision-making behind the scenes as the bank prepared to transfer the wealth business to Wells Fargo.

The internal emails and witness depositions portray top executives in 2015 as eager to offload expensive advisors whose commissions were dragging down the business. They also show how the bank tried to retain its richest clients and left the door wide open to re-enter the market with a different pay structure.

“We never agreed never to come back to wealth management,” Chief Executive Officer Tidjane Thiam, still in his first months on the job, wrote to a top executive on the morning of the pullout announcement.

That and other internal deliberations were revealed in a dispute with two of the dozens of former Credit Suisse advisors who sued over deferred pay that was withheld because they opted against moving to Wells Fargo.

When an unusual recruiting deal between Credit Suisse and Wells Fargo went awry, years of broker frustration, severe attrition and litigation followed. Also at stake: Up to $245 million in back pay.

Many of those cases have been fought outside public view, in arbitration proceedings. But after the bank lost one case and appealed that ruling last month, thousands of pages of arbitration documents were made public. In asking a New York court to vacate an industry panel’s ruling in the advisors’ favor, the bank said arbitrators had disregarded state law and the advisors had suffered no damages.

Executives of the Zurich-based bank considered the risk that litigation might increase the cost of exiting the business. One of the documents in the cache includes a chart that compares the cost of paying out those compensation claims against the risks of fighting off legal challenges.

Indeed, the bank’s tough legal stance in the case against the two advisors could be seen as a calculated bet that any negative publicity from the airing of its disputes would be more than offset by the value of deterring future claims, said Philip Aidikoff, a Beverly Hills securities attorney who represents investors and advisors.

“In my experience the reputational risk is overblown,” Aidikoff said. “It comes down to a business decision.”

Credit Suisse has said the advisors’ compensation claims have no merit, and it declined to comment on any plans it has to re-enter the business. “There is absolutely no credibility to this story,” said Candice Sun, a bank spokeswoman, without elaborating. “We fully exited our U.S. Private Banking business as announced in 2015.”

Wealth management has proved to be a reliable business for U.S. banks, fueled by the growing class of wealthy Americans who have booked 10 years of bull-market gains. Still, Thiam reiterated last week that a full return to U.S. private banking wasn’t on his to-do list.

“We are not in the U.S. in wealth management, but that is a strategic choice we made years ago,” he told Bloomberg Television in an interview at the World Economic Forum in Davos. “I said many times on the record our appetite to take on JPMorgan, Bank of America and the others in America is limited.”

Shortly after Thiam took over as chief executive in July 2015, he started a global strategic review of the bank and expressed particular dissatisfaction with its U.S. wealth-management business.

The “current U.S. private-banking operation did not meet sufficient profitability,” he told investors in October 2015, a day after Credit Suisse announced it was exiting U.S. wealth management. Thiam said the unit’s pay structure wasn’t sustainable because “value accrues to brokers, not shareholders.”

Thiam’s emails show that he wanted to leave room for Credit Suisse to continue to serve some of its wealthiest clients even after transferring the business to Wells Fargo. The San Francisco-based bank has thousands of wealth advisors, as do rivals including UBS, Morgan Stanley and Bank of America.

In a message on the morning the Wells Fargo deal was announced, Thiam told Robert Shafir, who was the Americas CEO of Credit Suisse, that he wouldn’t agree to give up serving ultrahigh-net-worth clients in the U.S. and would continue offering lending and other products to them.

“We do not intend to return to wealth management per se,” he wrote, according to the court documents. “We could agree to be silent on that point.”

Shafir, who’s now the CEO of Sculptor Capital Management, an asset manager, didn’t respond to requests for comment.

A key witness in the arbitration was David DeNunzio, a senior mergers and acquisitions executive at the bank who helped Shafir orchestrate the transfer of the business to Wells Fargo. He testified about internal discussions over the future of the wealth unit and an initiative to get rid of it, called “Project Light.”

“Are we better off making a clean break, effectively, exiting the business and then coming back into the business, presumably, by acquisition down the road with a different compensation regime? That was really the question that was on the table, so that the salary and bonus model that they had everywhere else in the world would be replicated here in the U.S.,” DeNunzio recalled.

Credit Suisse “did not wish to abandon the market from a long-run strategy perspective,” said DeNunzio, who’s now the global head of mergers and acquisitions at Wells Fargo. He didn’t respond to requests for comment.

The existence of Project Light was disclosed in a legal fight between Credit Suisse and two other advisors, and reported earlier by Financial Planning.

Approximately one-third of Credit Suisse's advisors chose to go to Wells Fargo. The rest went to competitors, with the lion's share ending up at UBS. The defectors were denied compensation that had been deferred until they met certain employment conditions.

The advisor switched firms only to see his new employer close shop 18 months later.
January 13

Richard DellaRusso and Mark Sullivan, the brokers whose case is before the New York court, initially filed their claims with arbitrators at the Financial Industry Regulatory Authority, Wall Street’s self-regulator. While at Credit Suisse, they received a roughly 42% cut of the revenue they generated at the bank, their attorney Barry Lax said. That was close to the industry average for brokerages that pay revenue-based commissions. By contrast, commercial banks often pay financial advisors salaries and annual bonuses.

The two advisors joined Credit Suisse in 2008 and, with close to $500 million in client assets, earned “tens of millions of dollars” while at the bank, Lax told Finra. As they departed, they were denied their deferred pay after they chose to go to UBS instead of Wells Fargo.

Some UBS executives had fun at Credit Suisse’s expense as many of its advisors were opting for UBS over Wells Fargo.

In an email titled “Credit Suisse Deal,” a UBS managing director, John Decker, wrote that Credit Suisse advisors were joking that “UBS stands for ‘Ultimate Beneficiary of our stupidity’ (Meaning Credit Suisse’s Stupidity) — (They are starting to grieve),” according to a copy of the message submitted in New York state court. Decker didn’t respond to a request for comment.

The advisors seeking payments from Credit Suisse say the bank terminated them without cause, which should have resulted in the vesting of their deferred pay under their employment contracts. Credit Suisse argues that the advisors quit to join UBS and other banks and therefore forfeited their deferred pay. Tens of millions of dollars are at stake, out of the $200 million in deferred pay that was pending when the Wells Fargo deal was announced.

There are indications that the bank may be looking to expand its toehold in the U.S. In October, Bloomberg News reported that Credit Suisse was considering a return to wealth management from a new base in Miami, catering to wealthy Latin Americans.

--With assistance from Sridhar Natarajan.

Bloomberg News