The U.S. Securities and Exchange Commission charged four former veteran investment bankers and traders at Credit Suisse Group for allegedly overstating the value of subprime bonds during the height of the credit crisis in order to protect their bonuses.
The SEC alleges that Credit Suisse’s former global head of structured credit trading, Kareem Serageldin, 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 under the control of their group. Instead, it says they priced the bonds in a way that allowed Credit Suisse to achieve fictional profits. Proper pricing would have revealed that Credit Suisse was incurring significant losses as the subprime market collapsed, the SEC says.
It also claims that Serageldin and Higgs periodically directed the traders to change the bond prices in order 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 commission alleges that the mispricing scheme was driven in part by the investment bankers’ desire for lavish year-end bonuses and, in the case of Serageldin, a promotion into the top echelon of the firm’s investment banking unit.
None of the allegations have been proven.
The SEC says that its decision not to charge Credit Suisse in the case was influenced by several factors, including the isolated nature of the wrongdoing, the firm’s immediate self-reporting to the SEC and other law enforcement agencies, as well as prompt public disclosure of corrected financial results. It also voluntarily terminated the four investment bankers and implemented enhanced internal controls to prevent a recurrence of the misconduct, and it “cooperated vigorously” with the SEC’s investigation. It notes that Higgs and the traders cooperated too.
“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.”