In significant market crisis based actions, the SEC and the U.S. Attorney for Manhattan brought, respectively, civil and criminal charges against former Credit Suisse Group traders centered on the overpricing of subprime bonds. SEC v. Kareem Serageldin, Civil Action 12 CIV 0796 (S.D.N.Y. Filed Feb. 1, 2012). The SEC’s complaint names as defendants for former bank traders: Kareem Seregeldin, Global Head of Structured Credit Trading at Credit Suisse, David Higgs, Managing Director and Head of Hedge Trading who reported to Mr. Serageldin, Faisal Siddiqui, vice president in Credit Suisse Group’s CDO Trading Group in New York who reported to Mr. Higgs, and Salmaan Siddiqui, vice president in Credit Suisse Group’s CDO Trading Group in New York who also reported to Mr. Higgs.

In late 2007 and 2008 the defendants specialized in structuring and trading mortgage backed securities. During this period they engaged in a fraudulent scheme to overstate the prices of more than $3 billion of subprime bonds owned by Credit Suisse. Mr. Seregldin initiated the scheme which was implemented by the other defendants, according to the complaint which is based in part on recordings of conversation involving the defendants.

The bonds held on the books of the bank had to be priced daily to record their fair value. As the fair value price declined in 2007 and after, recording the write downs would cause millions of dollars in losses for the bank. It would also eliminate Defendants’ hopes for large bonuses and jeopardize a promotion sought by Mr. Serageldin.

Beginning in late August 2007 defendants marked the bonds to the P&L rather than to fair value to avoid the impact of the required write downs. Defendants knew for example, that pricing a $3.5 billion of AAA rated bonds backed by subprime mortgages known as ABN1 at fair value would result in millions of dollars in losses. Despite having what the complaint calls “ample market data” showing that the bonds were over priced, the defendants maintained them at false high prices.

In mid-January Mr. Serageldin approved his units year end P&L results without correcting the incorrect year end prices. Indeed, shortly thereafter he directed that the prices for the bonds be increased above the prior year end level to achieve favorable P&L results at the end of January.

In mid-February Credit Suisse reported net income of CHF 8.55 or $7.12 billion, with fourth quarter earnings of CHF 1.3 or $1.16 billion. Those results were incorrect.

Shortly after reporting the fourth quarter results, Credit Suisse senior management began to unravel the fraud. They detected abnormally high prices on certain bonds controlled by Defendants. On February 19, 2008 the firm issued a press release stating that its financial results were incorrect. Subsequently, the bank revised net income for 2007 downward from CHF 8.55 or $7.12 billion to CHF 7.76 or $6.47 billion and for the fourth quarter of 2007 from CHF 1.3 or $1.16 billion to CHF 540 or $471 million. The write downs centered on the defendants’ ABN1 book which recognized a write down of about $1.3 billion.

The SEC’s complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). The case is in litigation.

In its press release the SEC, citing its Seaboad Report, took the unusual step of explaining the reasons it chose not to bring an action against Credit Suisse. In this regard the Commission stated that it was influenced by several factors including:

  • The isolated nature of the wrongdoing;
  • Credit Suisse’s immediate self-reporting to the SEC and other law enforcement agencies;
  • Its prompt public disclosure of corrected financial results;
  • The voluntary termination of the four bankers involved;
  • Its implementation of enhanced internal controls to prevent a reoccurrence; and
  • Its cooperation with the SEC’s investigation which included timely access to evidence and witnesses.

Messrs. Higgs, Fiasal Siddiqui and Salmaan Siddiqui also cooperated with the SEC.

Tagged with: , , , , ,