By Patricia Hurtado
(Updates with Siddiqui’s allocution in 13th paragraph.)
Feb. 1 (Bloomberg) -- Former Credit Suisse Group AG traders David Higgs and Salmaan Siddiqui pleaded guilty to falsifying prices tied to collateralized debt obligations to meet targets and boost year-end bonuses.
Switzerland’s second-largest bank said in 2008 it would take writedowns on asset-backed securities after finding “mismarkings” by a group of traders. The bank said it would write down $2.65 billion after a review found pricing errors on residential mortgage-backed bonds and CDOs made “by a small number” of traders who were subsequently fired or suspended.
Higgs and Siddiqui said today in Manhattan federal court today they engaged in the scheme at the direction of their supervisor at the time, Kareem Serageldin. Serageldin, who the bank today said was fired along with the two defendants in 2008, was global chief of synthetic CDOs at Credit Suisse.
U.S. District Judge Alison Nathan asked Higgs why he committed the crime and whether there was a monetary benefit.
“Yes -- a year-end bonus, your honor,” Higgs responded.
The prosecution is one of only a handful brought over charges tied to the subprime-mortgage market. The government failed in its biggest prosecution tied to the 2008 financial collapse when ex-Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin were acquitted in 2009 in Brooklyn, New York federal court of charges they misled investors who lost $1.6 billion.
Pleaded Guilty
Higgs and Siddiqui pleaded guilty to one count each of conspiracy to falsify books and records and commit wire fraud. The count carries a maximum five-year term and three years supervised release. They are both cooperating with the probe.
Higgs, 42, said in his allocution that he worked as a managing director in the investment banking division at Credit Suisse bank in London in 2007 and 2008.
“Beginning in 2007, the real estate market began to deteriorate in the U.S. and the valuations of mortgage-backed securities faced significant reductions,” Higgs said. “As the mortgage delinquencies increased, the value of the securities backed by the mortgages decreased and the market became increasingly illiquid.”
Mark Down
Rather than mark the securities down to market “as we were required to do,” Higgs said, Serageldin allegedly directed him and other traders at Credit Suisse to manipulate and inflate the “cash bond positions markings of a trading book referred to as ‘ABN1’ in order to hide losses.”
Higgs said senior management at Credit Suisse was given the false impression that the ABN1 book was profitable and caused Zurich-based Credit Suisse to report false year-end numbers for 2007 in their books and records.
At his plea hearing, Siddiqui told U.S. District Judge Paul Crotty he mismarked the ABN1 book at the direction of superiors. His lawyer, Ira Sorkin, said Higgs was his client’s boss and that Serageldin allegedly directed the scheme.
Siddiqui, 36, said he attended Dartmouth College and was currently unemployed. He told the judge he was instructed to mark the ABN1 trading book in December 2007 “when my colleague whose job it was to do so was out of town.” The securities in the ABN1 book included asset-backed securities cash bonds, he said. During that time, he said, “I was directed by my boss and my boss’s boss at Credit Suisse to mark certain bonds on the ABN1 book according to a P&L directive not according to their mark to market value.”
‘A Minor Role’
“He played a minor role in the conspiracy,” Sorkin said of his client after the plea hearing. “As he said in his allocution, he was directed by his boss and his boss’s boss, two senior officials at Credit Suisse to mismark the book. He has been cooperating both with the Securities and Exchange Commission and the U.S. attorney.”
A person familiar with the case said yesterday that fewer than five people will be charged as part of the CDO scheme. The person declined to be identified because the investigation isn’t public. Credit Suisse won’t be prosecuted, the person said.
John Nester, an SEC spokesman, declined to comment yesterday on the case.
Higgs and Siddiqui were to be released on $500,000 bond each while they await sentencing. Higgs will live in the U.K. and Siddiqui, who lives in McLean, Virginia, was ordered to surrender his passport. Crotty said Siddiqui agreed to pay unspecified restitution.
Fired in 2008
Higgs, Siddiqui and Serageldin haven’t worked for Credit Suisse since their employment was terminated in 2008, said Steven Vames, a spokesman for the bank in New York.
Serageldin couldn’t be immediately reached for comment on the allegations. He hasn’t been charged with any wrongdoing.
In his State of the Union address to Congress last month, U.S. President Barack Obama said he would establish a financial crimes unit “to crack down on large-scale fraud and protect people’s investments.” Obama urged lawmakers to “make the penalties for fraud count.”
He also announced the creation of a unit to increase investigations into mortgage lending and securitization. The unit will probe bank conduct that created the housing bubble and bust, including the packaging of loans into securities, said New York Attorney General Eric Schneiderman, a co-chairman of the group.
Planning Probe
Last year, federal prosecutors said they were planning to step up probes of fraud involving CDOs and credit default swaps.
Christopher Garcia, chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office in Manhattan, told white-collar criminal-defense lawyers at a conference last March that his office would spend 2011 investigating possible fraud involving CDOs and CDSs.
“If there’s crime there, we’re going to find it and we’re going to pursue it,” Garcia said at an American Bar Association meeting in San Diego. Investigators won’t be deterred by the complexity of the financial instruments, he said.
CDOs are pools of assets such as mortgage bonds packaged into new securities. Interest payments on the underlying bonds or loans are used to pay investors.
Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Garcia said in an interview after his presentation that his office is “bringing in people with expertise in these areas.”
“It’s an enforcement priority,” he said.
U.S. prosecutors in Washington in 2010 decided not to bring charges against former American International Group Inc. executive Joseph Cassano after a probe into whether executives in the firm’s Financial Products Division misrepresented the value of a portfolio of “super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market.
The cases are U.S. v. Higgs, U.S. v. Siddiqui, U.S. District Court for the Southern District of New York (Manhattan).
--With assistance from Dakin Campbell in San Francisco, David Glovin and David Evans in New York, Joshua Gallu in Washington and Elena Logutenkova in Zurich. Editors: David E. Rovella, Patrick Oster
To contact the reporter on this story: Patricia Hurtado in New York federal court at pathurtado@bloomberg.net.
To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net
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