The desire to fatten year-end bonuses motivated a Credit Suisse executive and two of his employees to conspire to hide the deteriorating condition of the U.S. housing market in 2007 to keep the value of bonds based on subprime mortgages artificially high, authorities said Wednesday.
Federal prosecutors in Manhattan said Kareem Serageldin, the financial company's former managing director and global head of structured credit, was slated to receive more than $7 million in compensation in 2007 before the company learned about the fraud and withheld $5.2 million of his pay. The fraud was blamed as responsible for a portion of a $2.65 billion write-down Credit Suisse announced in March 2008 of its 2007 year-end financial results.
"It is a tale of greed run amok," U.S. Attorney Preet Bharara said. "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."
Serageldin, 38, a U.S. citizen living in England, was portrayed by authorities as the leader of the fraud. He wasn't in custody and there were no immediate plans to seek his extradition on charges of conspiracy, falsifying books and records, and wire fraud, all of which carry a potential penalty of 45 years in prison, Bharara said.
"I would encourage him to come to the United States and answer the charges against him," the prosecutor said.
Meanwhile, David Higgs, 42, a former London-based managing director and a citizen of the United Kingdom, and Salmaan Siddiqui, 31, of McLean, Va., a former trader with the investment firm in Manhattan, seemed eager to identify others as they entered their pleas in U.S. District Court in Manhattan to conspiracy charges.
The criminal prosecution was one of the first to target those who sold complex investments called collateralized debt obligations that were based on the valuations of mortgages. The securities _ baskets of mortgage bonds _ have been blamed by some for contributing to the housing bubble and its spectacular collapse.
The probe _ which focuses on activities in 2007 and 2008 _ centers on exaggerations that brokers made about the value of subprime mortgage securities. Authorities say brokers enticed investors to pour money into the securities market for subprime mortgages by making the market sound healthy.
The ensuing subprime mortgage crisis fueled the financial meltdown in the fall of 2008 that pushed the U.S. into the most severe recession since the Great Depression of the 1930s.
After their pleas, Higgs and Siddiqui were freed on $500,000 bail. Higgs was permitted to cooperate from his home in England; Siddiqui can travel the country.
Higgs named his boss, Serageldin, five times as he blamed him and others for assisting his distortion of the value of subprime mortgage securities. Siddiqui, whose boss was Higgs, said he was "directed by my bosses and my boss's bosses."
Yet, the ruse apparently stopped short of the top since Higgs said his actions gave senior management the "false impression" that the housing securities he was manipulating were profitable. Authorities said the victim was the company and its shareholders.
Both men said they were motivated by a desire to please their bosses and enhance the value of their year-end bonuses.
"Today is a terribly difficult day for me and my family. I am truly sorry for what I've done," Higgs said. The defendant said he falsified records to enhance his job performance, which resulted in higher bonuses.
"I was directed by my bosses and my boss's bosses," Siddiqui said. His lawyer, Ira Sorkin, said after the plea that his client had a "minor role in the conspiracy."
Higgs said his crime began in 2007, when the real estate market began to deteriorate in the U.S. and the valuations of mortgage-backed securities faced significant reductions.
Higgs said a rising rate of mortgage delinquencies meant that the value of the securities backed by the mortgages decreased.
"Rather than mark these securities down to market as we were required to do," he said, Higgs and others manipulated and inflated the cash bond position markings of a trading book to hide losses and meet monthly profit-and-loss objectives. He said the manipulations led senior management at Credit Suisse to get the false impression that the securities were profitable and caused the investment firm to report false year-end numbers for 2007.
"I did this because I wanted to remain in good favor with my boss ... and enhance my job performance," Higgs said.
His lawyer, John L. Brownlee, declined to comment.
An indictment against Serageldin quoted him as telling Higgs, Siddiqui and a third person on Nov. 28, 2007 that "the housing market (was) going down the tubes" and that they had to "find a way to sell these bonds," referring to mortgage-backed bonds.
Federal regulators have brought civil charges against several big Wall Street firms accused of misleading investors about securities linked to risky mortgages in the years leading up to the financial crisis. The biggest settlement of the Securities and Exchange Commission's charges was with Goldman Sachs in July 2010. The firm agreed to pay $550 million.
Most of the government's cases related to banks' handling of mortgage securities in the run-up to the financial crisis have been civil proceedings, not criminal. All the cases have involved complex investments called collateralized debt obligations. Those are securities that are backed by pools of other assets, such as mortgages.
In a separate action, the SEC filed civil charges against those criminally charged and a fourth trader who wasn't criminally charged.
The government failed to win criminal convictions in a similar case brought against two Bear Stearns executives who ran hedge funds that collapsed after betting heavily on the subprime mortgage market. The two executives were acquitted in November 2009 of lying to investors.
Bear Stearns avoided bankruptcy in a rescue buyout by JPMorgan Chase in March 2008.
AP Business Writer Marcy Gordon in Washington contributed to this report.