Credit Suisse Group AG lost its second appeal of a FINRA arbitration case that involved unauthorized investments in auction-rate securities.  The federal appeals court in Manhattan ruled that the investment bank firm had to pay STMicroelectronics NV, Europe’s largest chipmaker, about $400 million.

In upholding most of a March 2010 ruling by U.S. District Judge Deborah Batts, who affirmed a 2009 arbitration award against Zurich-based Credit Suisse by a FINRA panel, the court said Batts should have lowered the amount owed by Credit Suisse because, before her decision, Geneva-based STMicroelectronics sold securities with a face value of $153.5 million to Deutsche Bank AG.

“The district court’s judgment should have credited Credit Suisse for about $75mn that ST received in exchange for selling some of the failed ARS's at issue in this case, and should have reduced Credit Suisse’s liability of interest accordingly.”

Risky Securities.   The institutional customer had accused Credit Suisse of investing in risky securities after claiming it would invest only in student loans backed by the U.S. government.  In 2009, Julian Tzolov and Eric Butler, former Credit Suisse brokers, were convicted of fraudulently selling securities to clients, including STMicroelectronics, that cost investors more than $1.1 billion in losses.  The bank claimed in court papers that the arbitration with STMicroelectronics focused too much on that case, even though Credit Suisse wasn’t charged with a crime.

Butler, convicted at a trial, was sentenced to 5 years in prison and is free on bail while he appeals. Tzolov, who pleaded guilty, hasn’t been sentenced yet.  In upholding the arbitration award, Batts cited a “record replete with evidence of Credit Suisse’s fraud.”

The case is STMicroelectronics NV (STM) v. Credit Suisse Securities (USA) LLC, 10-3847, U.S. Court of Appeals for the Second Circuit (Manhattan), and 09-cv-01388, U.S. District Court, Southern District of New York (Manhattan).   [Bloomberg, 6/2/11]