U.S. Department of Justice

United States Attorney
Southern District of New York

Friday, April 12, 2013

Former Credit Suisse Managing Director Pleads Guilty in Connection with Scheme to Hide Losses in Mortgage-backed Securities Trading Book

Kareem Serageldin, the former Managing Director/Global Head of Structured Credit in the Investment Banking Division of Credit Suisse Group pleaded guilty today, announced U.S. Attorney for the Southern District of New York Preet Bharara. Serageldin was extradited from the United Kingdom on Friday, April 5, 2013, to face charges that he fraudulently inflated the prices of asset-backed bonds in Credit Suisse’s trading book in late 2007 and early 2008.  The bonds were comprised of subprime residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS).  Once discovered, Serageldin’s manipulation of these bond prices contributed to Credit Suisse taking a $2.65 billion write-down of its 2007 year-end financial result.  He pleaded guilty to conspiring to falsify the books and records of Credit Suisse before U.S. District Judge Alvin K. Hellerstein.

As a result of his manipulation, Serageldin was able to secure significant year-end bonuses since the trading book’s profitability was one of the factors in determining bonus amounts.  His 2007 bonus was over $1.7 million and his Incentive Share Unit Award was more than $5.2 million.  The latter was rescinded after Credit Suisse discovered the alleged fraud.  Serageldin’s co-conspirators, David Higgs and Salmaan Siddiqui, previously pleaded guilty and are cooperating with the government’s investigation.

U.S. Attorney Bharara said: “While the real estate market was imploding and the financial crisis emerging, Kareem Serageldin and his co-conspirators concealed significant subprime mortgage-related losses in order to secure multi-million dollar paydays. Serageldin’s extradition to face charges for his role in this conspiracy and the guilty plea he entered today demonstrate, once again, that no one is above the law.”
 
The following allegations are based on the indictment filed against Serageldin and the informations to which Higgs and Siddiqui pleaded guilty:

Serageldin was employed at Credit Suisse as a managing director.  He held the position of Global Head of the Structured Credit Group in the Securities Department of Credit Suisse’s Investment Banking Division and divided his time between the company’s New York and London offices.  The Structured Credit Group held and traded ABS Asset Backed Security (ABS) cash bonds, which included RMBS and CMBS.  Serageldin oversaw and managed a number of trading books, including a trading book known as “ABN1.”  The ABN1 book was comprised primarily of several thousand individual long and short subprime-related positions and also included other securities. The long positions consisted of, among other things, various types of cash securities, including AAA-rated and non-AAA-rated cash bonds.  Until March 2008, ABN1 had a net asset value of approximately $5.35 billion, approximately $3.71 billion of which consisted of ABS cash bonds, including RMBS and CMBS positions.

     Pricing of Mortgage-Backed Securities

 Credit Suisse traders were required at all relevant times to price securities they held at their fair value, that is, on a “mark-to-market” basis, which was determined by reference to either the current market price of the asset or liability, or the current price for a similar asset or liability.  In the absence of a liquid market, Credit Suisse traders were required to look to other indicia in order to determine the fair value of the assets on their books.  During this time, the ABX Index served as a benchmark for certain securities backed by home loans.  It was widely understood within Credit Suisse that traders were to consult the corresponding ABX indices when pricing RMBS bonds and related products.

   The Bond Pricing Scheme

The deterioration throughout 2007 of the real estate market in the United States, including the subprime housing market, led to significant reductions in valuations of mortgage-backed securities.  As mortgage delinquencies increased across the country, the value of the securities backed by these mortgages decreased and the market for them became increasingly illiquid.

By late November 2007, Serageldin was aware that the market for mortgage-backed securities had declined enormously.  On Nov. 28, 2007, Serageldin told Higgs, Siddiqui and a co-conspirator that “the housing market [was] going down the tubes” and that they had to “find a way to sell these bonds,” i.e., mortgage-backed bonds in ABN1.  As Serageldin recognized, “[t]hose bonds are going to start trading worse than the [ABX] Index.”  Serageldin and his co-conspirators did not sell the bonds because the market prices for the bonds were substantially below the inflated value at which they marked the bonds.

 From August 2007 through February 2008, Serageldin, Higgs, Siddiqui and their co-conspirators artificially increased the price of bonds in order to create the false appearance of profitability in the ABN1 trading book.  Specifically, Serageldin directed Higgs on numerous occasions to reach specific profit & loss (P&L) targets on a daily and month-end basis.  Higgs, in turn, instructed Siddiqui and another unnamed co-conspirator to mark the books so as to achieve the particular P&L targets specified by Serageldin, rather than to reflect the fair value of the bonds. 

In order to reach specific P&L targets, Serageldin, Higgs, Siddiqui and their co-conspirators marked up bond prices without regard to fair market value; improperly offset mark-downs with gains realized in other parts of the book to avoid a P&L impact; and engaged in the practice of “reversing out,” which involved freezing marks at a favorable point in time to achieve a desired P&L result.  In addition, as part of their scheme, Serageldin, Higgs, Siddiqui and their co-conspirators concealed their manipulation of bond marks from internal control personnel within Credit Suisse who were charged with independently ensuring the accuracy of bond prices and they devised other ways to avoid detection of their fraud. 
     
Credit Suisse’s ABN1 Trading Book Was Falsely Inflated as a Result of the Scheme

As a result of the scheme, there was a growing disparity between the values ascribed to the marks in the ABN1 book and the available external benchmarks, such as the ABX Index.  From August 2007 through the end of that year, as ABX Index prices fell, bond prices in ABN1 that were supposed to reflect the ABX Index remained effectively stable, thereby giving the false impression to Credit Suisse senior management that the ABN1 book was profitable.  On one occasion in January 2008, Serageldin expressed concern to Higgs that the overpriced bonds were at risk of being discovered:  “We should mark these down because someone is going to spot this,” he said.

  The February 2008 Mark-Down

On March 20, 2008, Credit Suisse issued a press release which announced completion of its internal review and stated that the fair value reduction, or write-down, of the ABS positions – which included but was not limited to the ABNl book – was approximately $2.65 billion.  Approximately $540 million of this write-down was attributable to the ABN1 trading book and included ABS cash bonds for the fourth quarter 2007 that Serageldin manipulated and inflated in connection with his scheme.

Serageldin, 39, a citizen of the United Kingdom, faces a maximum sentence of five years in prison and a maximum fine of the greater of $250,000, or twice the gross gain or loss from the offense.  He is scheduled to be sentenced before Judge Hellerstein on Aug. 2, 2013.

U.S. Attorney Bharara praised the work of the FBI and thanked the Securities and Exchange Commission for its assistance in the investigation of this case.  

This case is being handled by the Office’s Securities and Commodities Fraud Task Force.  Assistant U.S. Attorney Eugene Ingoglia is in charge of the prosecution.

This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which U.S. Attorney Bharara serves as a co-chair of the Securities and Commodities Fraud Working Group. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations. Over the past three fiscal years, the Justice Department has filed nearly 10,000 financial fraud cases against nearly 15,000 defendants including more than 2,900 mortgage fraud defendants. For more information on the task force, please visit www.stopfraud.gov.

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