Several former Credit Suisse traders manipulated the books on mortgage-backed securities when the U.S. real estate market slumped in 2007 and 2008, two of the former traders at the investment bank said in court on Wednesday.
The men, David Higgs, 42, and Salmaan Siddiqui, 36, pleaded guilty in U.S. district court in New York to a criminal charge of conspiracy to falsify books and records and commit wire fraud.
Their one-time boss, Kareem Serageldin, 38, faces the same conspiracy charge and an additional charge of falsifying books and records and wire fraud.
Separately, the U.S. Securities and Exchange Commission filed civil charges against Serageldin, Higgs, Salmaan Siddiqui and Faisal Siddiqui, all former traders at the same investment bank. The Siddiqui's are not related.
Lawyers for Serageldin and Faisal Siddiqui were not immediately available to comment.
Higgs and Salmaan Siddiqui are cooperating with a U.S. government investigation on the writedowns of subprime mortgage derivatives at the height of the financial crisis.
There have been few prosecutions of individuals at high-profile banks for conduct that contributed to the financial crisis, but the Obama administration says it is stepping up investigations over the collapse of the subprime housing market.
In the case of Higgs and Salmaan Siddiqui, federal prosecutors brought a single conspiracy charge carrying a maximum prison term of up to 5 years, but not a charge of securities fraud, which carries a prison term of up to 20 years.
The additional substantive charge brought against Serageldin does carry a maximum possible prison term of 20 years. Serageldin had been managing director/global head of structured credit at Credit Suisse.
Higgs told a federal judge that while he was a managing director in the investment banking division of Credit Suisse in London in 2007 and 2008, he and others manipulated and inflated the cash bond position markings of a trading book, called ABN1, to hide losses.
As a result of my actions, senior management of Credit Suisse was given the false impression that the ABN1 book was profitable and caused Credit Suisse to report false year-end numbers for 2007 in their books and records, Higgs said in court.
He said he altered the records because he wanted to remain in good favour with Serageldin and enhance his job performance. He said he stood to receive a year-end bonus.
Serageldin, who was dismissed by Credit Suisse in 2008, lives in Britain, the Manhattan U.S. Attorney's office said.
It said the defendants' alleged manipulation of bond prices contributed to Credit Suisse taking a $2.65 billion (1.67 billion pounds) writedown of its 2007 year-end financial results.
Manhattan U.S. Attorney Preet Bharara said, 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. 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.
Higgs, who apologized for his conduct, said his boss and others had known about the manipulation and assisted in it. He looked dejected and spoke quietly in describing his conduct to U.S. District Judge Alison Nathan.
The investigation stems from $2.85 billion in writedowns that Credit Suisse took on collateralized debt obligations in 2008. Credit Suisse revealed those CDO losses in early 2008 and blamed them on a group of rogue traders who deliberately mispriced securities and on a failure of internal controls.
Credit Suisse was not charged in the case. A spokesman for the bank declined to comment on Wednesday. The company has cooperated with the government's investigations.
Salmaan Siddiqui of McLean, Virginia, told a different federal judge a similar story on Wednesday in the same courthouse.
I exchanged emails and telephone calls with my bosses who directed me to mismark the ABN1 book, Siddiqui said in a proceeding before U.S. District Judge Paul Crotty. I knew that what I was directed to do, and did, was wrong.
Higgs and Salmaan Siddiqui were released on $500,000 bond each. Higgs will be allowed to return to his home in Britain while the investigation continues. His lawyer, John Brownlee, declined to comment.
In court, Higgs said that traders were required to price securities that they held on a mark-to-market basis of the current market price of the asset or liability or similar assets or liabilities, according to accounting standards and the bank's policy.
Beginning in 2007 when the U.S. real estate market slumped and mortgage delinquencies increased, the value of securities backed by mortgages decreased and the market lost its liquidity.
Higgs told the judge that he and others manipulated the records rather than mark these securities down to market as we were required to do.
Salmaan Siddiqui's lawyer, Ira Lee Ike Sorkin, said after the plea proceeding that his client has been cooperating for some time with prosecutors and the SEC.
(Reporting By Grant McCool and Basil Katz in New York; Editing by Lisa Von Ahn, Andre Grenon and Steve Orlofsky)