Two Bank Execs Plead|Guilty; One on the Loose

     MANHATTAN (CN) – Two former Credit Suisse executives pleaded guilty to participating in a mortgage fraud that led to a $2.6 billion write-down, and agreed to testify against their alleged ringleader, federal prosecutors said.
     Former Credit Suisse managing director David Higgs and former Vice President Salman Siddiqui pleaded guilty Wednesday to conspiring to falsify books and commit wire fraud.
     They each face up to five years in prison and a fine of $250,000, or twice the amount of their gross gains.
     Their boss, managing director Kareem Serageldin, was indicted separately on the same charge, plus wire fraud and falsifying books and records.
     From late 2007 to early 2008, the men inflated the prices of asset-backed bonds, compromising subprime mortgage-backed securities for homes and businesses, prosecutors say.
     Credit Suisse allegedly took a $2.6 billion write-down in its 2007 year-end financial results because of the price manipulation.
     In a telephonic news conference Wednesday, prosecutors urged Serageldin, 38, to return from the United Kingdom with his lawyers.
     Though they do not consider him a fugitive, prosecutors said they would consider extradition if he does not return.
     If convicted, Serageldin faces up to 45 years in prison and a fine of $5 million.
     The SEC filed a parallel complaint against him.
     “The complaint reads like a ‘Greatest Hits’ list of mismarking how-tos,” SEC Director Robert Khuzami said during the telephonic news conference,
     Khuzami faced severe criticism after pushing for what many considered a lowball settlement with Citigroup, on mortgage fraud charges, and for balking at charging Citigroup executives for knowingly engaging in fraud.
     U.S. Attorney Preet Bharara declined to compare the two cases, but said the new case crossed the criminal threshold because of the cover-up, and evidence from wiretapped phone calls and cooperating witnesses.
     The 27-page indictment against Serageldin is filled with quotes taken from phone calls between the other defendants and two unnamed co-conspirators.
     In a November 2007 conversation, Serageldin allegedly told a co-conspirator that “the housing market [was] going down the tubes” and that they had to “find a way to sell the bonds.”
     As a Credit Suisse managing director, Serageldin oversaw and managed a number of trading books, including a trading book known as “ABN1,” the U.S. Attorney’s Office said in a statement.
     “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 [Profit & Loss] 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,” prosecutors said. “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.”
     By 2008, ABN1 was so inflated that Serageldin told Higgs, “We should mark these down because someone is going to spot this,” according to the indictment.
     Credit Suisse announced a $2.65 billion write-down in March 2008. About $540 million of that was directly attributable to the ABN1 book, prosecutors said.
     Bharara summed it up: “They papered over more than a half billion dollars in subprime mortgage-related losses to secure for themselves a big payday at the same time that many people were losing their homes and their jobs.”
     The indictment says Credit Suisse paid Serageldin a $1.7 million cash bonus in 2007, and an Incentive Share Unit Award of more than $5.2 million. The bank rescinded the share award after it discovered the alleged fraud.

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