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 intentionally priced the bonds ignoring specific market information that showed a sharp decline in the price of subprime bonds.
The changes in bond prices resulted in the group’s meeting the daily and monthly profit targets, and covering up losses in other trading books, as well as sending a wrong signal to senior management about their group’s profitability.
In February 2008, when the mispricing was detected, Credit Suisse disclosed $2.65bn in additional subprime-related losses related to the investment bankers’ misconduct.
According to SEC’s Division of Enforcement director Robert Khuzami, the mispricing scheme was driven by the bankers’ greed for high year-end bonuses and promotion into the senior management positions.
SEC has filed a complaint against the bankers’ and traders’ in the US District Court for the Southern District of New York. Credit Suisse’s self-reporting to the SEC and other law enforcement agencies as well as immediate public disclosure of corrected financial results spared it from being charged for the fraud.
The four investment bankers were promptly terminated by Credit Suisse, which later implemented enhanced internal controls to prevent recurrence of the fraudulent act.
