In one of the most significant market crisis cases to date, the former Global Head of Structured Credit Trading at Credit Suisse pleaded guilty to a conspiracy charge based on falsifying asset values which ended with the financial institution to take a $2.65 write down. Kareem Serageldin was charged in an indictment with conspiracy, falsifying books and records and wire fraud charges based on allegations that he and other falsifyed the values of certain mortgage backed securities held by Credit Suisse in late 2007. Two other members of his department, David Higgs and Salmaan Siddiqui, also entered guilty pleas. Mr. Higgs had been the Managing Director and Head of Hedge Trading. He reported to Mr. Serageldin. Mr. Siddiqui was a vice president in Credit Suisse’ CDO Trading Group in New York. He reported to Mr. Higgs. U. S. v Serageldin, 12 Crim 090 (S.D.N.Y.). The SEC’s parallel case alleging violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) is pending. SEC v. Serageldin, 12 Civ 0796 (S.D.N.Y.).
Mr. Serageldin and his group specialized in structuring and trading mortgage backed securities. The bonds held on the books of the bank had to be priced daily to record their fair value. In the absence of a liquid market traders looked to the ABX Index as a benchmark for certain securities backed by home loans.
As the market crisis unfolded and residential mortgage values declined, the value of the bonds dropped. In late August 2007 Mr. Seregldin and the others began marking the bonds to the P&L rather than to fair value or referencing the ABX Index. They knew at the time that if their book of bonds was properly priced the financial institution would have to take millions of dollars in write downs. By improperly pricing the bonds those write downs were avoided. At the same time it falsified the books of Credit Suisse.
The indictment provides a month by month account in the Fall of 2007 of how the defendants falsified the prices. In September and October, for example, the indictment details telephone calls in which the conspirators discussed the value of the bonds and how to price them in relation to the P&L. A key participant in those telephone calls was an individual identified only as “CC- 2.”
As a result of the scheme, Mr. Serageldin and the others gave Credit Suisse the false impression that their book of bonds was profitable. 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.
The scheme directly benefited Mr. Serageldin and the others, according to the indictment. The success of the section was a key factor in determining bonus amounts. For 2007 Mr. Serageldin was paid a bonus of over $1.7 million and his Incentive Share Unit Award was $5.2 million.
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 $7.12 billion to $6.47 billion and for the fourth quarter of 2007 from $1.16 billion to $471 million, according to the SEC. The write downs centered on the defendants’ book of bonds which ended with a write down of about $1.3 billion.