(Updates with guilty pleas in first paragraph.)
Feb. 1 (Bloomberg) -- Former Credit Suisse Group AG employees David Higgs and Salmaan Siddiqui will plead guilty to charges related to the intentional mismarking of prices tied to securities including collateralized debt obligations, a person familiar with the case said.
Switzerland’s second-largest bank announced in February 2008 that 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.
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.
Higgs surrendered this morning in Manhattan, according to J. Peter Donald, a spokesman for the Federal Bureau of Investigation. Higgs and Siddiqui are scheduled to appear today in Manhattan federal court, according to the government.
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 in the case. 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 is scheduled to appear before U.S. District Judge Alison Nathan in Manhattan at 10:30 a.m., according to Jerika Richardson, a spokeswoman for Manhattan U.S. Attorney Preet Bharara. Siddiqui is scheduled to appear at 11:30 a.m. before U.S. District Judge Paul Crotty, also in Manhattan.
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.
“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.”
Step Up Probes
Last year, U.S. 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.
“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. 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.
--With assistance from Dakin Campbell in San Francisco, David Glovin and David Evans in New York, Joshua Gallu in Washington and Elena Logutenkova in Zurich. Editors: David E. Rovella, Patrick Oster
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