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.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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