Two Plead Guilty In Sub-Prime Mortgage Probe
NEW YORK (AP / CBSNewYork) – Two former Credit Suisse traders pleaded guilty to conspiracy and signed cooperation agreements Wednesday in a long-running probe of the federal sub-prime mortgage securities market that was expected to result in more arrests.
WCBS 880’s Irene Cornell On The Case
Salmaan Siddiqui, who worked for the company in Manhattan, and a former London-based managing director, David Higgs, entered pleas to a charge of conspiracy to falsify books and records and commit wire fraud, which carries a potential maximum sentence of five years in prison.
Both admitted that they falsified the books to enhance their standing in the company and their year-end bonuses as the housing market collapsed.
“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.”
The probe – which focuses on activities in 2007 and 2008 – centers on exaggerations brokers made about the value of subprime mortgage securities. Authorities say brokers enticed investors to pour money into the securities market for sub-prime mortgages by making the market sound healthy.
Higgs said his crime began in 2007, when the real estate market began to deteriorate in the United States and the valuations of mortgage-backed securities faced significant reductions.
The ensuing sub-prime 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.
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 in the book 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 in their books and records.
“I did this because I wanted to remain in good favor with my boss — and enhance my job performance,” Higgs said.
Questioned by Judge Alison Nathan, Higgs said enhanced job performance would result in higher year-end bonuses.
Higgs, a UK citizen, will remain free on $500,000 bail and will be permitted to remain in England while he cooperates with prosecutors.
His lawyer, John L. Brownlee, declined to comment.
Siddiqui, 31, of McLean, Va., was freed on $500,000 bail.
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.
A spokesman for the Securities and Exchange Commission, which may file similar civil charges in the Credit Suisse case, declined to comment Wednesday.
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.
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