Kareem Serageldin, Credit Suisse Group AG’s former global head of structured credit trading, was charged in a scheme to falsify prices tied to collateralized debt obligations to meet targets and boost year-end bonuses for his $5.35 billion trading book.
Serageldin, 38, who lives in the U.K. and led the securities department of Credit Suisse’s investment banking division, was named in an indictment unsealed yesterday in New York. Two of his former subordinates, David Higgs, 42, and Salmaan Siddiqui, 36, pleaded guilty in federal court in New York yesterday and said they’re cooperating with the U.S. in the probe.
Higgs and Siddiqui said during their guilty pleas that Serageldin told them to overstate the value of mortgage-backed assets in a Credit Suisse trading book known as ABN1 after the collapse of the U.S. housing market. Both said they did so to enhance their job performance and bonuses.
“While the residential housing market was in a freefall, these defendants decided they were above the rules of the market and above the law,” Manhattan U.S. Attorney Preet Bharara told reporters yesterday.
Switzerland’s second-largest bank said in 2008 it would take writedowns on asset-backed securities after finding “mismarkings” by a group of traders. The Zurich-based bank said it would write down $2.65 billion after a review found pricing errors on residential mortgage-backed bonds and CDOs made “by a small number” of traders who were subsequently fired or suspended.
John C. Coffee Jr., a Columbia Law School professor, said the charges differ from the civil lawsuits in which banks are accused of lying about the risks of mortgage-backed securities sold to investors.
“Credit Suisse could say they were the victims of this crime,” Coffee said. “That’s fairly unusual.”
The U.S. Securities and Exchange Commission yesterday sued Serageldin, Higgs, Siddiqui and Faisal Siddiqui. The SEC identified Faisal Siddiqui, 36, of New York, as a vice president at Credit Suisse’s CDO trading group in New York. The SEC said that Salmaan Siddiqui and Faisal Siddiqui aren’t related.
“The defendants’ overvaluation of mortgage-backed securities benefitted them in the short run, and contributed to Credit Suisse incurring a two billion-dollar-plus write down when discovered,” Janice Fedarcyk, head of the FBI’s New York office, said yesterday at a press conference.
“While the housing market was collapsing, the defendants profited, not by correctly predicting the trend, but by cooking the books,” she said.
Serageldin earned $7.27 million in salary and other compensation in 2007, the U.S. said. Once Credit Suisse learned of the scheme, they rescinded more than $5.2 million of the incentive pay he received, prosecutors said.
Serageldin, a U.S. citizen living in the U.K., isn’t in U.S. custody, Bharara said.
“We do not consider him a fugitive,” Bharara said. “We encourage him and his lawyer to come to the United States and answer the charges against him.”
If Serageldin doesn’t come to New York, Bharara said his office will seek to extradite him.
“As we do in every case, when we charge people who are not in the United States, we work with the relevant authorities in that country to make sure we bring them here to face trial,” Bharara said.
Higgs and Salmaan Siddiqui said they participated in the manipulation scheme at Serageldin’s direction to meet targets and increase their compensation. The bank said yesterday that the three were fired in 2008.
“I, with the agreement and assistance of Kareem Serageldin and others, manipulated and inflated the cash bond position markings of a trading book referred to as ABN1, in order to hide losses in this book and to achieve specific daily and month-end profit and loss objectives,” Higgs told U.S. District Judge Alison Nathan.
“As a result of my actions, senior management of Credit Suisse was given the false impression that the ABN1 book was profitable and caused Credit Suisse to report false year-end numbers for 2007 in their books and records,” he said.
Higgs, who said in court that he worked as a managing director in the investment banking division at Credit Suisse in London, told the judge he participated in the scheme, “because I wanted to remain in good favor with my boss, Kareem Serageldin, and enhance my job performance.”
Asked by the judge if he received any monetary benefits, he said, “Yes, a year-end bonus, your honor.”
Higgs and Siddiqui, who worked for Higgs and was based in Manhattan, signed cooperation agreements with U.S. authorities in the probe. Lawyers for both said in court that they are also cooperating with the SEC.
Siddiqui, a Dartmouth College graduate who now lives in McLean, Virginia, said that at the end of 2007 he was directed by Higgs and a person he said was “my boss’s boss at Credit Suisse” to mark down the ABN1 trading book.
“I knew that what I was directed to do, and did, was wrong,” Siddiqui said. “Specifically on or about Dec. 31, 2007, I had a telephone conversation with my supervisor during which he communicated this directive.”
After court, Ira Sorkin, Siddiqui’s lawyer, identified his client’s immediate supervisor who led the scheme as Higgs and said Serageldin was Higgs’s boss who had known about the manipulated assets.
“He played a minor role in the conspiracy,” Sorkin said. “He has been cooperating both with the Securities and Exchange Commission and the U.S. Attorney.”
The evidence against the three men includes internal e-mails and telephone conversations recorded in keeping with Credit Suisse policy, said Assistant U.S. Attorney Virginia Chavez Romano in court. In addition to Higgs, a court document refers to four Credit Suisse employees without naming them.
In a phone call on Sept. 17, 2007, a data-entry employee in the ABN1 book who reported to both Higgs and Serageldin, asked Higgs: “What sort of P&L do you need today?” according to the charges.
“Higgs responded that all books should end the day ‘up’ by $35 million,” according to the U.S. Later, one of the traders “artificially increased the prices of several ABN1 positions” to meet Higgs’s profit target, prosecutors said.
Beginning in late 2007, risk management officials at Credit Suisse began questioning the valuation of the AAA-rated bonds in the ABN1 book, according to the government.
“We should mark these down because someone is going to spot this,” Higgs was told on Jan. 4, 2008, by the Credit Suisse employee he identified as Serageldin.
“As the mortgage delinquencies increased, the value of the securities backed by the mortgages decreased and the market became increasingly illiquid,” Higgs said yesterday in court.
On March 20, 2008, Credit Suisse announced it was writing down the value of its asset-backed securities by $2.65 billion. About $540 million of that amount was attributed to the ABN1 trading book, according to the government.
“As a result of my actions, senior management of Credit Suisse was given the false impression that the ABN1 book was profitable and caused Credit Suisse to report false year-end numbers for 2007 in their books and records in their books and records,” Higgs said.
Both Higgs and Siddiqui pleaded guilty to one count each of conspiracy to falsify books and records and commit wire fraud, which carries a maximum five-year prison term and three years of supervised release.
Higgs and Siddiqui were released on $500,000 bond each and ordered to surrender their passports. Both agreed to pay unspecified restitution, the U.S. said.
Higgs, Siddiqui and Serageldin haven’t worked for Credit Suisse since their employment was terminated in 2008, said Steven Vames, a spokesman for the bank in New York.
Serageldin couldn’t be immediately reached for comment on the allegations.
A person familiar with the case said that fewer than five people will be charged as part of the CDO scheme. The person declined to be identified because the investigation wasn’t public at the time. Credit Suisse won’t be prosecuted, the person said.
CDOs are pools of assets such as mortgage bonds packaged into new securities. Interest payments on the underlying bonds or loans are used to pay investors.
In his State of the Union address to Congress last month, U.S. President Barack Obama said he would establish a financial crimes unit “to crack down on large-scale fraud and protect people’s investments.”
Robert Khuzami, the head of enforcement at the SEC, said the case wasn’t tied to that unit.
The prosecution is one of only a handful brought over charges tied to the subprime-mortgage market. The government failed in its biggest prosecution tied to the 2008 financial collapse when ex-Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin were acquitted in 2009 in federal court in Brooklyn, New York, of charges they misled investors who lost $1.6 billion after their fund collapsed in 2007.
Julian Tzolov, and Eric Butler, two former Credit Suisse brokers, were convicted in 2010 of a scheme to fraudulently sell subprime securities to corporate clients that cost investors $1.1 billion in losses.
The U.S. said Tzolov and Butler falsely told clients the products were backed by federally guaranteed student loans and were a safe alternative to bank deposits or money market funds. Butler was sentenced to five years in prison while Tzolov, who pleaded guilty and testified against Butler at trial, was sentenced to four years in prison.
U.S. prosecutors in Washington in 2010 decided not to bring charges against former American International Group Inc. executive Joseph Cassano after a probe into whether executives in the firm’s financial products division misrepresented the value of a portfolio of “super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market.
Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
The cases are U.S. v. Higgs, 12-cr-00088, and U.S. v. Siddiqui, 12-cr-00089, U.S. District Court, Southern District of New York (Manhattan). The SEC case is U.S. Securities and Exchange Commission v. Serageldin, 12-cv-00796, U.S. District Court, Southern District of New York (Manhattan).