The CIBC logo on the side of a building at CIBC Square in downtown Toronto, on Sept 29, 2021.Fred Lum/the Globe and Mail
Canadian Imperial Bank of Commerce has agreed to pay $125-million to settle a class-action lawsuit that claimed the bank misled shareholders about its multibillion-dollar exposure to the U.S. subprime mortgage sector, which collapsed in 2008 and took the bank’s stock price down with it.
The lawsuit claimed that over a period of nine months starting at the end of May of 2007, CIBC failed to fully disclose that it had US$11.5-billion in total exposure through securities and derivatives tied to subprime real estate. The value of those securities would later implode in the financial crisis of 2008.
The action was launched that year in an attempt to recover funds for shareholders who bought the bank’s stock during that period and lost money. During the nine months covered by the class action, CIBC’s share price plunged 37 per cent to $67 from $106.
Now, after 14 years of legal wrangling, the settlement brings to a close a costly chapter in the bank’s recent history.
CIBC ultimately lost $9.3-billion before tax on investments tied to the subprime mortgage market, which consisted of loans to higher-risk borrowers such as those with histories of default or poor credit. Those losses included a $2.85-billion writedown recorded in the first fiscal quarter of 2008.
The settlement requires approval from an Ontario court, and a hearing has been scheduled for Jan. 12. If approved, investors who bought shares in CIBC between May 31, 2007, and Feb. 28, 2008, may be entitled to a payment.
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In settling the lawsuit, CIBC is not admitting wrongdoing or liability and spokesperson Trish Tervit said in an e-mail that the claims remain unproven.
“While we believe CIBC’s disclosure was appropriate and met all applicable requirements, we have reached an agreement to avoid further legal costs and put the matter behind us,” she wrote.
Joel Rochon, a partner at Rochon Genova LLP, the law firm that represented the plaintiffs, said in an interview that the settlement is a compromise that gives investors “meaningful restitution and … does remind the bank that there is an element of accountability when there are serious issues of non-disclosure of what we say was material information.”
The plaintiffs argued CIBC should have revealed the risks it faced much sooner, and instead made incomplete disclosures in quarterly reports through much of 2007. At the time, CIBC had told investors it was reducing its overall risk profile after being ensnared in previous scandals, including the accounting misconduct that toppled Enron Corp. in 2001.
Court records described high-level meetings of the bank’s top executives, confidential memos to its board of directors and minutes from its risk committee as the financial crisis unfolded. It also scrutinized public statements CIBC made in an effort to calm investors’ mounting concerns, and as part of its quarterly reporting.
Several former bankers who were top CIBC executives at the time, including CEO Gerald McCaughey, were also named as defendants.
CIBC initially contested the lawsuit, which was first filed in 2008, by arguing the plaintiffs were “second-guessing with hindsight CIBC’s judgments” made to value the securities and disclose the bank’s risks. Most of the bank’s exposure was through securities that were highly rated by ratings agencies, it said, and lawyers argued CIBC executives could not reasonably have foreseen the global credit collapse that followed.
CIBC made its judgements at the end of each quarter without knowing, “after each successive wave hit, that a larger and more destructive wave was to follow,” the bank said in court filings.
At the time, CIBC had direct exposure to the U.S. mortgage market of US$1.7-billion consisting of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) secured by mortgages. These financial instruments, which pooled mortgages and made it possible to invest in the revenue they generated, were generally regarded as stable investments at the time.
But CIBC also had a further US$9.8-billion in indirect exposure through credit default swap contracts – another financial instrument that serves as a form of insurance. At the end of August, 2007, when CIBC released its fiscal third-quarter report, that large hedged position was not disclosed. The lawsuit further claimed that the bank’s valuation of its positions was flawed.
Only in December, 2007, when CIBC released fourth-quarter results, did it give more extensive disclosure about the bank’s positions, both hedged and unhedged. The bank also acknowledged the potential for “significant future losses.”
That was a week after The Globe and Mail reported in late November that CIBC could have as much as $10-billion in hedged exposure to the troubled U.S. subprime mortgage sector, and the bank’s share price tumbled.
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