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Kareem Serageldin, the ex-global head of Credit Suisse Group AG (CSGN)’s CDO business charged in a bonus-boosting fraud tied to a $5.35 billion trading book, plans to fight extradition to the U.S. until he reaches a plea deal.
Serageldin’s lawyer told a London court yesterday that his client’s arrest this week outside the U.S. Embassy was a result of “miscommunication.” Ben Brandon said Serageldin was negotiating a plea bargain with U.S. prosecutors before the arrest. He was released on a 150,000-pound security ($243,000) until a Nov. 28 court hearing.
“Serageldin has absolutely no intention of whatsoever of fleeing,” Brandon said.
Serageldin, a U.S. citizen who lives in England, was charged in February with masterminding a scheme to fake collateralized debt obligations. In February, when he was first charged in Manhattan federal court, Serageldin said through his lawyers that he was surprised since he had been cooperating with U.S. investigators for four years.
Serageldin was named in an indictment unsealed in February accusing him of conspiracy, falsification of books and records and wire fraud. The conspiracy charge carries a maximum five- year prison term on conviction. The other counts are punishable by as many as 20 years. The case is being investigated by agents of the Federal Bureau of Investigation in New York.
“These are very serious allegations,” Judge Michael Snow said yesterday. He told Serageldin he may not leave his home between 11 p.m. and 6 a.m., and must wear an electronic tag.
Serageldin, who was born in Egypt, wants to renounce his U.S citizenship and serve part of any sentence in the U.K., Brandon said.
Two of his Serageldin’s subordinates, David Higgs and Salmaan Siddiqui, pleaded guilty Feb. 1 in New York to manipulating prices.
Higgs and Siddiqui admitted to manipulating the profit and loss targets at Serageldin’s direction to meet daily and monthly goals and increase their compensation. The bank said the three were fired in 2008.
Siddiqui, “together with his co-conspirators, manipulated and inflated ABS cash bond position markings in the ABN1 book in order to achieve specific daily and month-end profit and loss objectives; in other words, they artificially increased the price of bonds in order to create the false appearance of profitability in that trading book,” according to the criminal information to which he pleaded guilty. “Siddiqui engaged in this scheme in order to enhance his apparent job performance, knowing that his eligibility for CS bonuses was determined by his superiors,” according to the plea document.
The Credit Suisse 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 federal court in Brooklyn, New York, of charges they misled investors who lost $1.6 billion.
Julian Tzolov and Eric Butler, two former Credit Suisse brokers, were convicted in 2010 of a scheme to fraudulently sell subprime securities to corporate clients that cost investors $1.1 billion in losses.
Tzolov and Butler were convicted of falsely telling clients the products were backed by federally guaranteed student loans and were a safe alternative to bank deposits or money market funds.
When he announced the case in February, Bharara urged Serageldin to come to the U.S. to face the charges. Serageldin’s previous lawyer, James McGuire, said in a February interview that his client was blindsided by Bharara’s prosecution because he was fully cooperating with U.K. and U.S. investigators including Bharara.
“Serageldin, Higgs and Siddiqui were able to secure significant year-end bonuses for themselves since bonus amounts were largely based on trading books’ profitability,” Bharara said at a news conference announcing the prosecution. “They papered over more than a half-billion dollars in subprime mortgage-related losses to secure for themselves a big payday.”
Higgs said during his plea in February that he worked as a managing director in the investment banking division at Credit Suisse in London in 2007 and 2008. He said that beginning in 2007, when the real estate market began to deteriorate in the U.S., the valuations of mortgage-backed securities faced significant reductions. As mortgage delinquencies increased, the value of the securities backed by the mortgages decreased and the market became increasingly illiquid, Higgs said.
Rather than mark the securities down to market as required, Higgs and other traders at Credit Suisse were directed by Serageldin to manipulate and inflate the “cash bond positions markings of a trading book referred to as ‘ABN1’ in order to hide losses,” Higgs said during his guilty plea.
Higgs said the manipulations gave senior management at Credit Suisse the false impression that the ABN1 book was profitable and caused Zurich-based Credit Suisse to report false year-end numbers for 2007 in its books and records.
Siddiqui told the judge during his plea that he mismarked the ABN1 book at the direction of superiors. After court, his lawyer, Ira Sorkin, said Higgs was Siddiqui’s boss and that Serageldin allegedly directed the scheme.
The U.S. Securities and Exchange Commission also filed a related lawsuit against Serageldin, Higgs, Siddiqui and another man.
In letters to the judge presiding over the SEC case, lawyers for both the government and Serageldin have indicated that they were in discussions to resolve both the criminal and civil matters.
Sean Casey and Scott McCulloch, who are representing Serageldin in both cases, wrote to U.S. District Judge Laura Taylor Swain in Manhattan in August, seeking to put the SEC case on hold until November, “in light of continuing discussions between the parties.”
Howard Fischer, a lawyer with the SEC, had written to Swain in May.
“We understand that there are currently discussions in the criminal matter that may lead to a resolution of the charges against Mr. Serageldin in the near future,” Fischer said. “This resolution may also lead to a full resolution of the SEC charges as well.”
The U.S. criminal cases are U.S. v. Higgs, 12-cr-00088, and U.S. v. Siddiqui, 12-cr-00089, U.S. District Court, Southern District of New York (Manhattan). The SEC case is U.S. Securities and Exchange Commission v. Serageldin, 12-cv-00796, U.S. District Court, Southern District of New York (Manhattan).
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