Two traders at Credit Suisse have pleaded guilty to wire fraud and falsifying data after authorities said they had manipulated the bank's record systems, as the credit crunch approached, in order to help conceal over half a billion dollars' worth of losses.
The traders admitted to circumventing a mandatory real time reporting system introduced by Credit Suisse, manually entering false profit and loss (P&L) figures as the products they handled collapsed in value. They did so, according to the accusations, under heavy pressure from their manager, who has also been charged.
The pleas come after a four-year investigation that involved the FBI trawling through thousands of financial records, emails and recorded phone calls – some of which provide potentially devastating evidence. The FBI and US Attorney have insisted they are determined to hold individuals responsible for any possible part they played in the economic crisis.
The traders, David Higgs, 42, and Salmaan Siddiqui, 36, pleaded guilty to attempting to manipulate around $3 billion in subprime mortgage-backed securities on order to reduce how bad losses looked. A large amount of the alleged activities took place in Credit Suisse's London offices in Canary Wharf, as well as in New York.
Their line manager, Kareem Serageldin, 38, has been charged with falsifying records and with wire fraud. Serageldin, who was the managing director of structured credit at the bank, lives in the UK, and will be expected to travel to the US to face the charges. It is understood he may contest the charges.
The three are also facing civil charges from US financial regulator the Securities and Exchange Commission. Credit Suisse itself has not been charged by the FBI or SEC.
Subprime mortgages are essentially loans issued to customers whom the banks expect to have more difficulty paying – and are charged at a higher interest rate. Those mortgages and the complex investment vehicles attached to them were widely blamed as playing a key role in triggering the current economic crisis.
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In 2008, Credit Suisse took a $2.65 billion writedown from the credit crunch, much from complex products, known as collateralised debt obligations and linked to subprime mortgages. It blamed a number of its traders for mispricing the products, but also admitted internal control failures.
The traders and their manager in the FBI and SEC cases are accused of contributing over $500 million to this writedown.
The SEC said in a statement that the 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.
"Serageldin and Higgs periodically directed the traders to change the bond prices in order to hit daily and monthly profit targets, cover up losses in other trading books, and send a message to senior management about their group's profitability."
Credit Suisse had implemented a system in August 2007, whereby the firm's trading desks were required to produce "flash" reports of P&L movements on real time systems. "In light of this enhanced scrutiny of their bonds, Defendants Serageldin and Higgs were placed under intense pressure to avoid showing negative P&L," said the SEC in its complaint, filed in a Lower Manhattan court.
A month later, during a phone conversation a trading assistant in the team said to Serageldin: "If you want [profit and loss] to be a big number let me know what you want, then I'll just go through it with [Higgs] because obviously I can move things back to where they were ... if you're looking for a big number today...".
The conversation was easily retrieved by lawyers and investigators because Credit Suisse recorded UK trader phone conversations to a system as part of its business policy.
"While the residential housing market was in free fall, and shock waves were reverberating throughout the economy, these defendants decided they were above the rules of the market and above the law," said Manhattan US Attorney Preet Bharara - who famously put Galleon founder Raj Rajaratnam behind bars – as he filed the charges.
"As alleged, they papered over more than a half billion dollars in subprime mortgage-related losses, to secure for themselves a big payday at the same time that many people were losing their homes and their jobs."
The bonuses and share incentives were potentially worth millions of dollars for each individual.
Higgs and Siddiqui face up to five years in prison. Serageldin, if convicted, faces five years in prison on the conspiracy count, and a maximum sentence of 20 years in prison on each of the books and records and the wire fraud counts, as well as a $5 million fine.
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