March 20 (Bloomberg) -- Credit Suisse Group fell 6.4 percent in Swiss trading after the company said it may post a first- quarter loss because of writedowns on debt securities deliberately mispriced by employees.

Switzerland's second-largest bank dropped 3.30 francs to 48.50 francs, bringing declines this year to 29 percent. The Zurich-based company said today it will write down $2.65 billion over the fourth quarter of 2007 and the first three months of 2008, making a profit this quarter ``unlikely.''

An internal review found that the pricing errors, first announced last month, were made intentionally ``by a small number'' of traders who have since been fired or suspended. The episode is the biggest setback for Chief Executive Officer Brady Dougan since he took over from Oswald Gruebel in May after heading the investment banking unit for three years.

``This is clearly embarrassing for Credit Suisse and further damages the reputation that it had worked so hard to improve,'' said Peter Thorne, a London-based analyst at Helvea SA, in a note. He has a ``neutral'' rating on the shares.

The quarterly loss would be the first since 2003. The markdowns led Credit Suisse to reduce fourth-quarter net income by almost 60 percent to 540 million francs ($532 million). Profit for 2007 was cut to 7.76 billion francs.

`Different Light'

Derek Chambers, a London-based analyst at Standard & Poor's, cut his rating on the stock to ``hold'' from ``buy.'' Analysts at Commerzbank AG and Cheuvreux also reduced their recommendations.

The announcement of writedowns as a result of pricing errors came as a surprise on Feb. 19, just a week after the bank said its risk management systems helped it sidestep the worst of the U.S. subprime mortgage market crash. Under Gruebel, 64, and Dougan, Credit Suisse had returned to stable earnings after a decade of management turnover, bungled acquisitions and the first criminal conviction of a bank in Japan.

The incident follows revelations of unauthorized trades at Societe Generale SA, France's second-largest bank, and MF Global Inc., the largest broker of exchange-traded futures and options.

Societe Generale said in January that the bank lost 4.9 billion euros ($7.6 billion) after 31-year-old trader Jerome Kerviel took unauthorized positions on European stock index futures. Last month MF Global said Evan Dooley lost $141.5 million with bets on the wheat market.

``Severe Consequences'

``This incident is unacceptable,'' Dougan, 48, said. ``We are taking strong action to remediate and move forward.''

The Swiss bank hasn't disclosed the names of the traders responsible for the incorrect pricing of residential mortgage- backed bonds and collateralized debt obligations. Credit Suisse said it reassigned trading responsibility for the CDO business and took measures to improve controls to prevent and detect misconduct.

``This is quite disappointing,'' said Dirk Sebrechts, a fund manager at KBC Asset Management SA, which oversees more than $15 billion in equities. ``Apart from writedowns, we've seen earnings come down and they will come down further.''

Traders are required to mark their trading books to market levels daily, and managers have to sign off, Dougan said on a conference call with analysts and journalists. The misconduct was limited to traders and didn't involve those overseeing them, he said. About half of the 1.18 billion-franc writedown on these trading positions in the fourth quarter was attributed to incorrect pricing.

``There will be very severe consequences for the traders,'' said Dougan, who added that he had difficulty understanding their motivation. He declined to comment on whether the traders received their 2007 bonuses before being suspended or whether the bank plans to take any legal action against them.

`Difficult' March

Credit Suisse said it was profitable through the end of February, though will probably have a loss for the quarter because of worsening market conditions this month. The world's biggest financial firms have fired more than 30,000 workers in the last seven months and reported at least $195 billion in writedowns and losses.

``March has been a very difficult month,'' Dougan said. ``Trading results have been very difficult given the extreme volatility in the markets.''

At the end of February, the bank held 15.7 billion francs in CDOs that were marked down because of pricing errors and 13.3 billion francs in hedges for those bonds.

Dougan, a native of the U.S., earned 22.3 million francs last year, the bank said in its annual report today, publishing the CEO's salary for the first time. Dougan said on the conference call that his compensation declined 40 percent last year. Chairman Walter Kielholz took a pay cut of 8.7 percent to 14.6 million francs in 2007.

The investment bank's ``core businesses continue to perform quite well,'' Paul Calello, who took over the division from Dougan, said on the conference call. The wealth management unit saw ``good inflows in line with our targets,'' Dougan said.

The bank aims to complete its share buyback program, though ``in the near term we won't be buying much stock,'' Dougan said. Credit Suisse still plans to pay a dividend of 2.50 francs per share for 2007.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

Last Updated: March 20, 2008 12:59 EDT