Several former Credit Suisse Group AG traders manipulated the books on mortgage-backed securities when the U.S. real estate market slumped in 2007 and 2008, a former London-based trader at the investment bank admitted in court on Wednesday.
The former trader, David Higgs, pleaded guilty in U.S. District Court in New York to a criminal charge of conspiracy to commit falsification of books and to commit wire fraud. He is co-operating in a U.S. government investigation on the writedowns of subprime mortgage derivatives at the height of the financial crisis.
The investigation stems from $2.85-billion (U.S.) in writedowns that Credit Suisse took on collateralized debt obligations in 2008. Credit Suisse revealed those CDO losses in early 2008 and blamed them on a group of rogue traders – who the bank said had deliberately mispriced securities – and on a failure of internal controls.
Credit Suisse was not charged in the case. A spokesman for the firm declined to comment on Wednesday. The firm has co-operated with the government’s investigations.
Mr. Higgs told a federal judge that, while he was a managing director in the investment banking division of Credit Suisse in London in 2007 and 2008, he and others manipulated and inflated the cash bond position markings of a trading book, called ABN1, in order to hide losses.
“As a result of my actions, senior management of Credit Suisse was given the false impression that the ABN1 book was profitable and caused Credit Suisse to report false year-end numbers for 2007 in their books and records,” Mr. Higgs said in court.
He said he altered the records because he wanted to remain in good favour with his boss and “enhance” his job performance. He said he stood to receive a year-end bonus.
Mr. Higgs, who apologized for his conduct, said his boss and others had known about the manipulation and assisted in it. He looked dejected and spoke quietly in describing his conduct to U.S. District Judge Alison Nathan.
Another former Credit Suisse trader, Salmaan Siddiqui of Virginia, also pleaded guilty to the same criminal charge in the same courthouse on Wednesday.
Mr. Higgs and Mr. Siddiqui each face a maximum possible prison sentence of up to five years. Both were released on a $500,000 bond. Mr. Higgs will be allowed to return to his home in Britain while the investigation continues.
In court, Mr. Higgs explained that traders were required to price securities that they held on a mark-to-market basis of the current market price of the asset or liability or similar assets or liabilities, according to accounting standards and the bank’s policy.
Beginning in 2007 when the U.S. real estate market slumped and mortgage delinquencies increased, the value of securities backed by mortgages decreased and the market lost its liquidity.
Mr. Higgs told the judge that he and others manipulated the records “rather than mark these securities down to market as we were required to do.”