Former Credit Suisse Employee Surrenders

Bloomberg on February 1, 2012 released the following:

“By Patricia Hurtado

Former Credit Suisse Group AG (CSGN) employee David Higgs pleaded guilty to conspiracy related to the intentional mismarking of prices tied to securities including collateralized debt obligations. Another former bank employee, Salmaan Siddiqui, will plead guilty later today, a person familiar with the case said.

Switzerland’s second-largest bank said in February 2008 it would take writedowns on asset-backed securities after finding “mismarkings” by a group of traders. The bank said a month later it would write down $2.65 billion after an internal review found pricing errors on residential mortgage-backed bonds and CDOs were made intentionally “by a small number” of traders who were then fired or suspended. At the time, the bank hadn’t disclosed the names of the traders.

Higgs said in Manhattan federal court today that he engaged in the scheme “to remain in good favor” with his superiors.

The prosecution is one of only a handful brought over charges tied to the subprime-mortgage market. The government failed in its biggest prosecution tied to the 2008 financial collapse when ex-Bear Stearns Cos. hedge-fund managers Ralph Cioffi and Matthew Tannin were acquitted in 2009 in Brooklyn, New York federal court of charges they misled investors who lost $1.6 billion.

Surrendered Today

Higgs, who the FBI said surrendered this morning, pleaded guilty to one count of conspiracy to falsify books and records and commit wire fraud. The count carries a maximum five year prison term and three years supervised release.

The U.S. Securities and Exchange Commission was also involved in the probe, said another person familiar with the case, who added that fewer than five people will be charged. Both people declined to be identified because the investigation isn’t public. Credit Suisse won’t be prosecuted, one of the people said. John Nester, an SEC spokesman, declined to comment yesterday about the prosecution.

Higgs appeared before U.S. District Judge Alison Nathan, who said the former trader is cooperating with the government’s probe. He will be released on $500,000 bond and live in the U.K. while he awaits sentencing. Siddiqui is scheduled to appear at 11:30 a.m. in the same courthouse before U.S. District Judge Paul Crotty.


Higgs and Siddiqui haven’t worked for Credit Suisse since their employment was terminated in 2008, said Steven Vames, a spokesman for the bank in New York. A call and e-mail to Siddiqui’s lawyer, Ira Sorkin, weren’t immediately returned.

“Following its revaluation review, Credit Suisse has determined that the pricing errors were, in part, the result of intentional misconduct by a small number of traders,” Credit Suisse said in a statement on March 20, 2008. “These employees have been terminated or have been suspended.”

In his State of the Union address to Congress last month, U.S. President Barack Obama said he would establish a financial crimes unit “to crack down on large-scale fraud and protect people’s investments.” Obama urged lawmakers to “make the penalties for fraud count.”

New Unit

He also announced the creation of a unit to increase investigations into mortgage lending and securitization. The unit will probe bank conduct that created the housing bubble and bust, including the packaging of loans into securities, said New York Attorney General Eric Schneiderman, a co-chairman of the group.

Last year, federal prosecutors said they were planning to step up probes of fraud involving CDOs and credit default swaps.

Christopher Garcia, chief of the Securities and Commodities Fraud Task Force in the U.S. Attorney’s Office in Manhattan, told white-collar criminal-defense lawyers at a conference last March that his office would spend 2011 investigating possible fraud involving CDOs and CDSs.

Pursue Probes

“If there’s crime there, we’re going to find it and we’re going to pursue it,” Garcia said at an American Bar Association meeting in San Diego. Investigators won’t be deterred by the complexity of the financial instruments, he said.

CDOs are pools of assets such as mortgage bonds packaged into new securities. Interest payments on the underlying bonds or loans are used to pay investors.

Credit default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Garcia said in an interview after his presentation that his office is “bringing in people with expertise in these areas.”

“It’s an enforcement priority,” he said.

U.S. prosecutors in Washington in 2010 decided not to bring charges against former American International Group Inc. (AIG) executive Joseph Cassano after a probe into whether executives in the firm’s Financial Products Division misrepresented the value of a portfolio of “super senior” credit-default swaps, which insured bond losses tied to the U.S. housing market.”


Douglas McNabb – McNabb Associates, P.C.’s
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