CIBC loses billion-dollar suit to New York hedge fund over debt deals dating back to the 2008 U.S. housing crisis

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Canadian Imperial Bank of Commerce CM-T could be forced to pay more than US$1-billion in damages after being found liable for losses incurred by a New York hedge fund over two debt deals dating back to the 2008 U.S. housing crisis.

CIBC said Friday it intends to appeal the decision handed down by a New York State court late Thursday, which found the bank liable for damages in a case filed by Cerberus Capital Management LP in November, 2015.

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While the court has not determined the exact amount the bank will have to pay, Cerberus has claimed damages of nearly US$1.1-billion, though CIBC said it will “vigorously dispute” that figure at a Dec. 19 hearing. CIBC said it expects to record a charge against its earnings for the first quarter of 2023, which began Nov. 1. The amount of the estimated loss “will be informed by developments in the quarter.”

The ruling marks the second time in as many months that a major Canadian bank has faced a billion-dollar charge against earnings after losing a years-long legal battle.

A jury in a Minnesota bankruptcy court found the U.S. arm of Bank of Montreal was liable in early November for US$564-million in damages related to a nearly $2-billion Ponzi scheme, one of the largest-ever frauds of that kind. BMO also said it planned to appeal the decision, though also took a $1.1-billion charge at the time.

Cerberus, a New York-based hedge fund, alleged CIBC defaulted on payments related to a limited recourse note the bank issued in 2008, as well as a related transaction in 2011. Limited recourse notes are a type of debt instrument that combines elements of preferred shares and traditional corporate bonds to provide fixed-income investors with higher yields.

According to CIBC’s public filings, the two transactions with Cerberus “significantly reduced CIBC’s exposure to the U.S. residential real estate market.”

The ruling handed down Thursday was the second financial blow to CIBC in less than 24 hours. Earlier on Thursday, the bank reported fourth-quarter results that fell short of analyst expectations, with profit down 18 per cent on a year-over-year basis as costs rose 10 per cent over the same period.

Four of the 16 analysts who cover CIBC downgraded the stock to the equivalent of a hold and cut their share price targets in the hours after the release of its fourth-quarter results.

Like BMO, CIBC had not made any provisions for a potential loss as the court case proceeded. In CIBC’s statement Friday, the bank said that was because “it believed it was more likely than not to prevail at trial.”

However, CIBC said it included “a material amount” for the Cerberus matter in a disclosure in its financial statements about the range of reasonably possible losses for all its legal claims, from zero to about $1.5-billion as of Oct. 31.

That disclosure said CIBC had $275-million in total provisions for all its legal matters as of Oct. 31.

According to International Accounting Standard 37, which governs how public companies are to handle provisions, there are “rare cases, for example in a lawsuit,” in which companies can argue a provision is not required. To do so, the company must “take account of all available evidence,” including the opinions of outside experts, to determine which outcome is most likely.