Four former Credit Suisse investment bankers and traders have been charged by the SEC after allegedly overstating the price of £1.9 billion in sub-prime bonds.
The Securities & Exchange Commission alleged that Kareem Serageldin, former global head of structured credit, David Higgs, former head of hedge trading, and two mortgage bond traders took part in the scheme to fraudulently overstate the prices at “the height of the sub-prime credit crisis”.
The regulator alleges that the mispricing scheme was driven by a “desire for lavish year-end bonuses” and a promotion for Serageldin.
The SEC alleged that the quartet “deliberately ignored specific market information showing a sharp decline in the price of sub-prime bonds under the control of their group”.
The regulator alleges that the bonds were priced to allow the group to achieve fictional profits, with the trades directed by Serageldin and Higgs “periodically” to the traders to change prices to hit daily and monthly profit targets, cover up losses, and “send a message to senior management about their group’s profitability”.
SEC enforcement division director Robert Khuzami says: “The stunning scale of the illegal mismarking in this case was surpassed only by the greed of the senior bankers behind the scheme.
“At precisely the moment investors and market participants were urgently seeking accurate information about financial institutions’ exposure to the sub-prime market, the senior bankers falsely and selfishly inflated the value of more than £1.9 billion in asset-backed securities in order to protect their bonuses and, in one case, protect a highly coveted promotion.”
The complaint filed by the SEC claims that Serageldin “frequently communicated to Higgs the specific profit and loss outcome he desired”, with Higgs directing the traders in turn.
The regulator says after the mispricing was detected, Credit Suisse disclosed £1.7 billion in additional sub-prime losses.
According to the SEC, Credit Suisse was not charged as it immediately self-reported to the regulator and other agencies.