SEC Names Ex-Credit Suisse Employees in Subprime Fraud Scheme

Four former investment bankers and traders from the Credit Suisse Group were charged by the Securities and Exchange Commission (SEC) Wednesday violating multiple sections of the Securities Exchange Act of 1934 while trading in subprime mortgage bonds.  The indictments allege the four engaged in a complex scheme to fraudulently overstate the prices of $3 billion of the bonds during the height of the subprime credit crisis. 

The four are Kareem Serageldin, the group's former global head of structured credit trading; David Higgs, former head of hedge trading; and two traders, Faisal Siddiqui and Salmaan Siddiqui.  According to the complaint filed in U.S. District Court for the Southern District of New York, Serageldin oversaw a significant portion of Credit Suisse's structured products and mortgage-related businesses. The traders reported to Higgs and Serageldin.

The SEC charges that the four deliberately ignored specific market information showing that prices of the subject bonds were declining sharply, pricing them instead in a way that allowed Credit Suisse to achieve fictional profits, and, through the traders, changing bond prices in order to hit daily and monthly profit target and cover losses.  The scheme was driven in part by the prospect of lavish year-end bonuses and promotions.  The scheme hit its peak at the end of 2007.

"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 the SEC's Division of Enforcement and a Co-Chair of the newly formed Residential Mortgage-Backed Securities Working Group, "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."  

SEC explained that it was not charging Credit Suisse in the scheme because the wrongdoing was isolated; Credit Suisse reported the violations to the SEC, voluntarily terminated the four, implemented internal controls to prevent additional misconduct, and cooperated with SEC in the investigation.  The SEC said that the four named in the complaint also cooperated in the investigation and that assistance was provided by the FBI, the U.S. Attorney's Office for the Southern District of New York and the United Kingdom Financial Services Authority.