Why did Credit Suisse AT1 bondholders sue FINMA after the wipeout?

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Credit Suisse AT1 Bondholders Sue Swiss Regulator Over Unconstitutional Actions

A group of Credit Suisse Group AG bondholders, holding US$4.5 billion of the bank's Additional Tier 1 (AT1) bonds that were written down, have initiated legal action against Switzerland's financial market supervisory authority, Finma. The core of their claim is that Finma acted unconstitutionally when it ordered Credit Suisse to cancel the US$17 billion in AT1 debt as part of the bank's rescue by UBS. This decision has led to significant anger among bondholders who believed their position should have been more secure than that of shareholders during the emergency deal.
Allegations of Unconstitutional Regulatory Action

The bondholders contend that Finma's directive to cancel the AT1 debt was a breach of constitutional principles. They argue that the regulatory body overstepped its authority in mandating the write-down of this specific class of debt. This legal challenge is rooted in the perception that the regulator's actions were not in line with established legal frameworks, leading to the substantial financial losses experienced by the bondholders.
Bondholders' Expectations Versus Regulatory Decision

A key point of contention is the perceived hierarchy of claims in a bank rescue scenario. Bondholders typically expect to be senior to shareholders in the event of a financial distress or liquidation. However, in the context of Credit Suisse's emergency takeover by UBS in March, Finma's decision to fully write down the AT1 bonds while shareholders retained some value reportedly created a significant grievance. This outcome defied the conventional understanding of creditor protection in such situations.
Legal Proceedings Initiated in Switzerland

The lawsuit was formally filed by the prominent law firm Quinn Emanuel in St. Gallen, Switzerland. This legal move signifies a determined effort by the affected bondholders to seek recourse and challenge the regulatory decision that led to the complete loss of their investment. The firm has previously stated that its clients represent a "significant" portion of the total value of the wiped-out AT1 bonds, underscoring the scale of the financial impact.

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Why did Credit Suisse AT1 bondholders sue FINMA after the wipeout?

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