Steffen Schmidt/European Pressphoto Agency
Federal prosecutors are preparing to file criminal charges against former traders at Credit Suisse, accusing them of defrauding investors by mispricing mortgage securities, according to a person with direct knowledge of the matter.
Charges could be filed as soon as Wednesday, said this person, who requested anonymity because he was not authorized to discuss the case publicly. It is unclear how many traders will be charged.
The Credit Suisse traders are expected to be accused of overvaluing the positions on their books in order to increase their bonuses from the bank, this person said.
A case would be among the government’s first criminal prosecutions involving a bank’s valuation of complex securities called collateralized debt obligations, or C.D.O.’s, which are created from bundles of mortgage bonds. The securities contributed to the inflating housing bubble and its subsequent collapse, which brought about the financial crisis of 2008.
The Justice Department has come under criticism for not bringing enough criminal cases connected to companies at the center of the financial crisis. In November 2009, in the first major criminal case connected to the financial crisis, a federal jury in New York City acquitted two Bear Stearns hedge fund managers on charges that they had misled investors as their portfolio of mortgage-backed securities plummeted in value.
At last week’s State of the Union address, President Obama said that the government would redouble its efforts to investigate banks and other financial firms.
A new task force, said President Obama, “will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”
The Credit Suisse case has its origins in early 2008 when the Swiss bank fired a group of traders for inflating the value of collateralized debt obligations. The Swiss bank was forced to revalue to mismarked securities and take a $2.85 billion write-down.
The losses tied to the pricing errors were a major embarrassment for Credit Suisse, which performed better than most of its competitors during the credit crisis. Credit Suisse, which has been cooperating with the authorities in their investigation, will not be charged in the case. A spokesman for Credit Suisse declined to comment.
A spokeswoman for the United States attorney in Manhattan declined to comment. A spokesman for the Securities and Exchange Commission, which is expected to file a parallel civil action, declined to comment.