U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22247 / February 1, 2012
SEC v. Kareem Serageldin et al., Civil Action No. 12 CIV. 0796 (Swain) (S.D.N.Y., filed Feb. 1, 2012)
SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme
The Securities and Exchange Commission today announced a civil action against four former veteran investment bankers at Credit Suisse Group for engaging in a complex scheme to fraudulently overstate the prices of $3 billion in subprime bonds during the height of the subprime credit crisis.
According to the SEC’s complaint, Credit Suisse’s former global head of structured credit trading Kareem Serageldin and 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. They instead priced them in a way that allowed Credit Suisse to achieve fictional profits. Serageldin and Higgs periodically directed the traders, Faisal Siddiqui and Salmaan Siddiqui, to change the bond prices in order to hit profit targets, cover up losses in other trading books, and send a message to senior management about their group’s profitability.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Serageldin oversaw a substantial portion of Credit Suisse’s structured products and mortgage-related businesses. Faisal Siddiqui and Salmaan Siddiqui, who are not related, reported to Higgs and Serageldin. As the subprime credit crisis worsened in late 2007 and 2008, Serageldin frequently communicated to Higgs the specific profit & loss (P&L) outcome he wanted. Higgs in turn directed Faisal Siddiqui or Salmaan Siddiqui to mark the book in a manner that would achieve the desired P&L. However, under the relevant accounting principles and Credit Suisse policy, the group was required to record the prices of these bonds to accurately reflect their fair value. Proper pricing would have reflected that Credit Suisse was incurring significant losses as the subprime market collapsed.
The SEC’s complaint alleges that the scheme reached its peak at the end of 2007, when the group recorded falsely overstated year-end prices for the subprime bonds. Despite acknowledging that the subprime bonds were mispriced, Serageldin approved his group’s year-end results without making any effort to correct the prices. When the mispricing was eventually detected in February 2008, Credit Suisse disclosed billions of dollars in additional subprime-related losses related to the investment bankers’ misconduct.
The SEC’s complaint alleges that Serageldin, Higgs, Faisal Siddiqui, and Salmaan Siddiqui violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder, and aided and abetted pursuant to Section 20(e) of the Exchange Act violations of Sections 10(b) and 13(a) and 13(b)(2) of the Exchange Act and Rules 10b-5 12b-20 and 13a-16 thereunder.
The SEC's investigation was conducted by Staff Accountant Kenneth Gottlieb, Senior Counsel Kristine Zaleskas, Senior Specialized Examiner Michael Fioribello, Assistant Regional Director Michael Paley, and Assistant Regional Director Michael Osnato, Jr. in the SEC’s New York Regional Office. Senior Trial Counsel Howard Fischer will lead the SEC's litigation efforts.
The SEC thanks the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and United Kingdom Financial Services Authority for their assistance in this matter.