ZURICH, SWITZERLAND – Kareem Serageldin, one of three Credit Suisse senior managers fired by the bank in 2008 when a massive fraud in the sub-prime mortgage market was uncovered, has been arrested in London. The bank at the time lost CHF2.5 billion from the scheme “initiated” by Sergeldin, according to US court documents filed in New York:
“As the subprime credit crisis escalated in late 2007 and 2008, Defendants—investment bankers and traders specializing in structuring and trading mortgage-backed securities—engaged in a scheme to fraudulently overstate the prices of over $3 billion of subprime bonds owned by Credit Suisse Group (Credit Suisse). Defendants’ words—captured on recorded telephone calls—provide a real-time narrative of their colossal fraud.”
Extradition proceedings to the US will begin Thursday 27 September, London’s Metropolitan Police told Reuters. Serageldin reportedly holds US and British citizenship.
He was charged with several counts of fraud by the US Department of Justice in February 2012 (Serageldin indictment, pdf). Serageldin was, from 2003 to 2008, global head (managing director) of the structured credit group in the securities department of the CS investment banking division, working in London and New York.
Incident led to tighter controls on trading
Credit Suisse announced in March 2008 that, following a revaluation review of “certain asset-backed securities positions in its CDO trading business”, it had “determined that the pricing errors were, in part, the result of intentional misconduct by a small number of traders. These employees have been terminated or have been suspended and are in the process of being disciplined under local employment law. The review also found that the controls put in place to prevent or detect this activity were not effective.”
CEO Brady Dougan insisted that “This incident is unacceptable and it does not represent the high standard of Credit Suisse. Our overall control framework remains sound. We are taking strong action to remediate and move forward.” The bank in 2008 put in place a series of controls to more closely monitor the trading environment.
Serageldin supervised others who pleaded guilty
Two other bankers were also charged and pleaded guilty in February to conspiracy to commit wire fraud and falsify books and records, after admitting to inflating mortgage bonds that were used to back securities trades. It was “the first successful US prosecution of employees of a major bank involved in the subprime meltdown of 2007-08″, according to Reuters.
All three plus a fourth man have also been charged with similar crimes by the Securities and Exchange Commission.
Serageldin, according to Business Week, could face, for the conspiracy charge, 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.” The news magazine also reports that he was surprised to be charged in February, with his lawyers saying he had been cooperating with US officials for four years.