The Securities and Exchange Commission charged four Credit Suisse (CS) subprime-bond bankers with fraud. The SEC alleges they overstated the worth of $3 billion in subprime bonds sold by Credit Suisse.
The regulator said the fraud came about as the former global head of structured credit trading, Kareem Serageldin, sought to outperform rivals to gain admission to a senior position at the Swiss banking giant.
According to the SEC, Serageldin and David Higgs, former head of hedge trading, along with two mortgage bond traders deliberately ignored specific market information showing a sharp decline in the price of subprime bonds.
"They instead priced them in a way that allowed Credit Suisse to achieve fictional profits," the SEC alleges.
Serageldin and Higgs periodically directed the traders to cover losses in the trading books in order to earn huge bonuses on the fictional outperformand of the subprime bonds.
"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 enforcment at the SEC.
"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," Khuzami said.
Higgs and the two bond traders, Faisal Siddiqui and Salmaan Siddiqui, helped the SEC mount its case and cooperated in the investigation.
As the subprime credit crisis accelerated in late 2007 and 2008, Serageldin frequently communicated to Higgs the specific profit and loss outcome he wanted. Higgs in turn directed the traders to mark the book in a manner that would achieve the desired results.
This went against stated Credit Suisse policy to record bond values at fair value.
"When the mispricing was eventually detected in February 2008, Credit Suisse disclosed $2.65 billion in additional subprime-related losses related to the investment bankers’ misconduct," the SEC said.