Georgian billionaire Bidzina Ivanishvili’s $800 million lawsuit against a trust firm owned by Credit Suisse Group AG is set to become a test case for the global industry handling billions in assets for wealthy families.
A win for Ivanishvili against Credit Suisse Trust (Singapore) Ltd. may force a major rethink of how and when trust operators flag unusual transactions or other shady practices.
“People in the industry, not only from Singapore but all over the world, are watching the case to see what will be determined as the standard or duty of care that trustees owe to the beneficiaries,” said Tang Hang Wu, a law professor at Singapore Management University who specializes in areas including trusts and wealth management.
The focus may prompt international banks, who oversee trust firms that cater to their millionaire clients, to examine their strategies. Credit Suisse announced on the second day of the trial the sale of its global trust business, a move it said was part of a regular review. Others like Barclays Plc and Rothschild & Co. have offloaded their trust businesses in recent years, while the likes of UBS Group AG and JPMorgan Chase & Co. offer them as part of their wealth management services.
In the case of Credit Suisse, the Singapore trust entity was briefly part of the Swiss bank’s wealth management business from 2012 to 2013. Its auditing as well as legal and compliance functions worked with line managers in Zurich they reported to, Dominik Birri, the former head of the bank’s trust business in Singapore, testified during the ongoing three-week trial in the city-state.
Clifford Ng, a partner at Zhong Lun Law Firm in Hong Kong, says conflicts can arise when “trustee services are subsidized by other parts of the banks’ business.” Trustees would be less likely to pull assets from the private bank even if investments are not performing or ill-advised, Ng said.
The bitter dispute in this case dates to 2004 when Ivanishvili, a former prime-minister of Georgia who made his fortune in post-Soviet Russia, chose Credit Suisse to park about $1.1 billion of his fortune. That same year a Frenchman named Patrice Lescaudron who spoke Russian but had no banking experience at the time, joined the bank. Within two years, he was handling the biggest clients in the region, including Ivanishvili.
But when the private banker ran into losses on behalf of his clients a few years later, he admitted he panicked and began to fake signatures on trade orders and run duplicate statements as he bought time to try and make up the losses. His ruse was not exposed until 2015 when a massive wrong-way bet triggered more than $120 million worth of margin calls for Ivanishvili.
Ivanishvili’s lawyers argued during the trial that the trustee which controls the accounts should safeguard and monitor the assets, and should have intervened, especially, they say, when red flags about Lescaudron’s behavior were raised as early 2006.
“Had the trustee investigated the unauthorized payments and conducted a proper review of the trust, as it was required to do by the law and its own policies, it would have realized that trust assets were being misappropriated and/or being invested by persons without any authority to do so,” said Cavinder Bull, Ivanishvili’s lead lawyer at the trial.
Lawyers for CS Trust countered that, by contract, the trustee was supposed to only administer the trust structure and not to monitor any outgoing funds. Ivanishvili and his adviser George Bachiashvili, who both testified last week, should have been held responsible for investment decisions made on their behalf, the lawyers said.
Trusts have been around for centuries under English common law, and offer a means of managing assets across generations. Their numbers are hard to quantify, though there is growing pressure within the European Union to make registration a requirement.
A growing drive for global transparency and a crackdown by the European Union on money laundering means registrations should substantially rise, according to the Society of Trust and Estate Practitioners, a London-based professional body with 21,000 members in 96 countries.
In Singapore at least, the industry has boomed as the Asian city-state becomes a magnet for family fortunes. There are 64 licensed trust companies in Singapore, according to the financial regulator’s data, which doesn’t include the amount of money they manage.
SMU’s Tang says the current case exposes the disagreement over the limits of responsibility within a trust deed. Some argue that even though the trustees are not bound to intervene in the decisions of trust-owned companies, if they learn something is seriously wrong, they must do something, Tang says.
“In other words, in the face of actual knowledge of wrongdoing, the trustees must interfere.”
At the trial on Monday, when Birri, the former Singapore trust head, was asked by the trial judge whether he should have intervened to stop Lescaudron’s unauthorized payments since 2006, he said: “no, we were not policing that.”
“The only thing we could do is escalate and escalate to compliance, business risk, line management, to the bank,” he testified.
Birri said he didn’t contact Ivanishvili despite years of seeing unauthorized payments made by Lescaudron out of the trust because he believed the billionaire only wanted to be contacted by his relationship manager directly, and it was “not uncommon” to encounter unauthorized payments — in the 1,500 trust structures he oversaw at the company.
It remains to be seen what, if anything, the trust will end up costing Credit Suisse in damages. A verdict on the case is expected in Singapore in the first quarter of next year.
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