The top federal prosecutor in Manhattan, Preet Bharara, announced some big mortgage fraud charges in New York on Wednesday, accusing three former high-level employees of Credit Suisse with jacking up the book value of bundled housing loans they were selling. In one quarter alone, Bharara charges, they overstated the value by $540 million, boosting a top executive’s bonus to $1.7 million in 2007 and contributing to an eventual $2.65 billion write-down by the bank. This is one of the first big criminal busts in the world of mortgage bonds, three years after the collapsing value of those complex investment vehicles nearly destroyed the global economy.
In the cover story in this week’s issue of TIME, Bill Saporito and I write about Bharara, who has spent the last two-and-a-half years delivering on Main Street’s desire for heads to roll on Wall Street. We report out some of the controversial tactics he’s using, look at whether they’ll stand up in court, and assess the likelihood that his arrests will have a lasting effect on the street.
In a rare interview last week, Bharara said he’s aiming big. When he came to the job in 2009, he says he found that, “There was a creeping culture of corruption in our politics and also in Wall Street and in business generally.” His greatest successes against Wall Street crime have come from prosecuting insider trading, a practice which he says “tells everybody at precisely the wrong time that everything is rigged and only people who have a billion dollars and have access to and are best friends with people who are on boards of directors of major companies, they’re the only ones who can make a true buck.”
Wednesday’s indictments deliver on the hard-to-prosecute category of Wall Street crime associated with the great recession. According to the charges, in late November 2007 Kareem Serageldin, a managing director at Credit Suisse and Global Head of the Structured Credit Group, told David Higgs, another managing director, and Salmaan Siddiqui, a vice president, that “the housing market [was] going down the tubes” and that they had to “find a way to sell these [housing-based] bonds.” The three then “artificially increased the price of [the] bonds in order to create the false appearance of profitability,” Bharara’s office claims.
Higgs and Siddiqui pleaded guilty to conspiracy to commit falsification of books and records and wire fraud on Wednesday. According to the U.S. Attorney’s office, they are cooperating with prosecutors and Ira Sorkin, Siddiqui’s lawyer, told the Wall Street Journal his client played “a minor role” in the case. Serageldin, who faces similar charges, lives in Britain and was unavailable for comment. Credit Suisse was not charged.
Since becoming the U.S. Attorney in the Southern District of New York, Bharara has expanded the office’s work on securities fraud, busting 63 people for insider trading, convicting 56 of them, with seven trials still pending. So far Bharara has no losses in the insider trading cases, but he’s embracing some controversial techniques. In the story, we highlight one: his success in getting a wiretap not for a single line, but for a conference call line. That enabled Bharara to listen in on 93 people for whom the government admitted it did not have probable cause to believe they would use the line for a crime. One case is on appeal to the Second Circuit Court of Appeals based after the warrant was upheld at the district level, and it could go to the Supreme Court.
I first wrote about Bharara in 2007 when he was a staffer on the Senate Judiciary Committee uncovering the political motivations behind the firing of nine U.S. prosecutors under then-Attorney General Alberto Gonzales. Bharara is best friends with an author of the Patriot Act, Viet Dinh, who is now a board member at NewsCorp. Bharara recused himself from the Southern District’s investigation of the NewsCorp hacking allegations after I wrote about their friendship last summer.
One of Bharara’s characteristics is his combination of blue-collar, former mob-prosecutor attitude with an unabashed moralist’s talk of high standards. In my interview, for example, he said he learned the value of wiretaps as a line prosecutor in Manhattan: “When you’re trying to make a racketeering case that involves charges of extortion, which by definition include threats of violence, and you have a guy saying, like you might see on The Sopranos, ‘I’m going to staple your eyeball,’ that’s pretty good evidence. And you get that all the time.” In the same conversation, he talked about the need for high standards among prosecutors. “In this office, we talk every day about doing what is right by the law and by our conscience and try to use the most aggressive technique that is appropriate to the task at hand, within limits of the law,” he said.
That mix has won him admirers on the left and the right: from Dinh, former U.S. Attorney and New York mayor Rudy Giuliani, and former Deputy White House Counsel Bill Burck to his former boss Democratic Senator Chuck Schumer and the partisan staffers he served with on Capitol Hill.
You can read more about Bharara and the cases he’s pursuing in the next issue of TIME, now available online to subscribers and on newsstands Friday.