Ex-Bankers 'Mismarked' Bonds at Credit Suisse
February 1, 2012
Four former investment bankers at Credit Suisse have been charged with ‘mismarking’ subprime bonds, as part of a scheme to overstate their values during the height of the credit crisis.
The Securities and Exchange Commission alleges that the former bankers and traders at Credit Suisse Group fraudulently overstated the prices of $3 billion in subprime bonds.
The regulator said Credit Suisse’s former global head of structured credit trading Kareem Serageldin and former head of hedge trading David Higgs along with two mortgage bond traders “deliberately ignored specific market information showing a sharp decline in the price of subprime bonds.’’
Neither Credit Suisse nor the former bankers and traders were immediately available for comment.
According to the SEC, the bonds were mispriced to allow the company to register fictional profits.
Serageldin and Higgs told traders to change the bond prices 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, the SEC said.
Also motivating them were ‘lavish year-end bonuses,’ it said.
“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. “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.”
The SEC alleges that the scheme reached its peak at the end of 2007, when the group recorded falsely overstated year-end prices for the subprime bonds.
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.
Credit Suisse was not charged in the case.
The SEC’s decision not to charge Credit Suisse was influenced by several factors, including the isolated nature of the wrongdoing and Credit Suisse’s immediate self-reporting to the SEC and other law enforcement agencies as well as prompt public disclosure of corrected financial results.
Credit Suisse voluntarily terminated the four investment bankers and implemented enhanced internal controls to prevent a recurrence of the misconduct.
