The Securities and Exchange Commission (SEC) charged four former investment bankers and traders at Credit Suisse Group for their "complex scheme to fraudulently overstate" the value of $3 billion in subprime bonds during the subprime credit crisis' height.
The SEC alleged that Credit Suisse’s former global head of structured credit trading Kareem Serageldin and former head of hedge trading David Higgs together with two mortgage bond traders "deliberately ignored specific market information" that indicated a sharp drop in the price of subprime bonds controlled by their unit at the bank.
The SEC said these individuals instead priced these bonds in a way that allowed the bank to get fictional profits.
According to a Bloomberg report, Higgs pleaded guilty on Wednesday in a Manhattan federal court to intentionally mismarking prices tied to securities such as CDOs to boost his year-end bonus. Additionally, he also admitted to taking part in the scheme to remain in good favor with his boss Serageldin and to enhance his job performance.
Meanwhile, other published reports stated that Salmaan Siddiqui, a trader who used to report to Higgs, pleaded to conspiracy to falsify books and records. He was scheduled to enter a guilty plea an hour after his former boss in the same federal court.
The SEC statement said that Serageldin and Higgs periodically told traders to change the bond prices as a way to hit daily and monthly profit targets, cover up the losses in other trading accounts, as well as to send a message to senior management regarding their team’s profitability.
The SEC alleged that the mispricing scheme was partly driven by these bankers’ wanting robust year-end bonuses and, in the case of Serageldin, a promotion into the senior-most part of the financial institution's investment banking unit.
“The stunning scale of the illegal mismarking in this case was surpassed only by the greed of the senior bankers behind the scheme,” said Robert Khuzami, director of the SEC’s division of enforcement. “At precisely the moment investors and market participants were urgently seeking accurate information about financial institutions’ exposure to the subprime market, the senior bankers falsely and selfishly inflated the value of more than $3 billion in asset-backed securities in order to protect their bonuses and, in one case, protect a highly coveted promotion.”
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Serageldin oversaw a lot of the bank's structured products and mortgage-related businesses. The traders reported to both Serageldin and Higgs.
As the subprime crisis reached its height in late 2007 and 2008, the SEC said Serageldin frequently communicated to Higgs the specific profit & loss (P&L) outcome he wanted. Higgs then directed the traders to mark the book to achieve the desired P&L. But, under the relevant accounting principles and Credit Suisse policy, the group had to record the bond prices to accurately reflect their fair value. Indicating the proper pricing would have showed that Credit Suisse was experiencing considerable losses along with the subprime market's collapse.
The SEC charged that the scheme reached its peak at the end of 2007, when the unit recorded falsely overstated year-end prices for the subprime bonds. Days later on a recorded call, Serageldin and Higgs admitted that the year-end prices were too high and stated their concern that risk personnel at the bank might “spot” the mispricing. Despite admitting that the subprime bonds were mispriced, Serageldin approved his group’s year-end results without correcting the prices.
When the mispricing was later detected in February 2008, Credit Suisse disclosed $2.65 billion in added subprime-related losses connected to the investment bankers’ misconduct, SEC disclosed.