Analysis of a major bank’s US$12 Billion subprime mortgage-backed credit derivative portfolio and potential stock inflation due to alleged disclosure defects

April 2022
Close up of safe

In a recently settled Canadian securities class action dating back to 2008, plaintiffs alleged that Canadian Imperial Bank of Commerce (“CIBC” or “the Bank”) and certain individual officers and directors “violated the Ontario Securities Act through material misrepresentations and non-disclosures relating to CIBC’s exposure to the US sub-prime mortgage market,” and sought damages of “[CAD] $5 billion.” After over a decade and multiple litigation phases, the trial, which was scheduled to start in October 2021, was adjourned after a settlement agreement was reached where CIBC will pay the plaintiffs CAD$125 million. (See CIBC 2021 Annual Report, page 186.)

The allegations centered around the fair value of the Bank’s US$12 billion subprime mortgage-backed credit derivative portfolio primarily made up of exposure to complex Collateralized Debt Obligations (CDOs) and the amount of artificial inflation in CIBC’s stock the alleged defects may have caused.

CRA was retained by counsel for defendants and the CRA team, led by Vice President Rahul Surana and Principal Nikolai Caswell, supported CRA Senior Consultant Dr. Mukesh Bajaj who opined on and analyzed the reasonability of the Bank’s subprime-backed credit derivative fair value marks using detailed structured finance cash flow models. Dr. Bajaj also opined on the stock price impact attributable to the alleged disclosure defects and quantification of alleged artificial inflation. The CRA team also supported Prof. John McConnell, Burton D. Morgan Distinguished Chair of Private Enterprise (Finance) at Purdue University, who opined on the foreseeability of the unprecedented US home price declines leading up to and during the Class Period, among other economic issues.