Testimony: Willie Pest (CPA at PWC). Sarbanes Oxley violations

8/10/2019 Testimony: Willie Pest (CPA at PWC). Sarbanes Oxley violations

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C of CP, Philadelphia County Miller v. Santilli, et al. FridayJuly Term, 2006, No. 1225 Videotape Deposition of Victor Hong June 27, 2008

180 Tuckerton Road, Suite 5, Medford, NJ 08055(856) 983-8484 Tate & Tate, Inc. (800) 636-8283

Page 1

COURT OF COMMON PLEAS

PHILADELPHIA COUNTY

JULY TERM, 2006

NO. 1225

GEORGE L. MILLER, Chapter 7 Trustee

of the bankruptcy estates of American

Business Financial Services, Inc. and

subsidiaries,

Plaintiff,

v.

ANTHONY J. SANTILLI, et al.,

Defendants.

------------ Friday, June 27, 2008

------------

Oral sworn videotape deposition of

VICTOR HONG, taken at the law offices of Wilmer,

Cutler, Pickering, Hale & Dorr, LLP, 399 Park

Avenue, New York, New York, on the above date,

commencing at 8:12 a.m., there being present:

KAUFMAN, COREN & RESS, P.C.

1717 Arch Street, Suite 3710

Philadelphia, PA 19103

BY: STEVEN M. COREN, ESQ.

DAVID DORMONT, ESQ.

PAMELA ELCHERT THURMOND, ESQ.

Attorneys for Plaintiff

and

OBERMAYER, REBMANN, MAXWELL & HIPPEL, LLP

1617 JFK Boulevard, 19th Floor

Philadelphia, PA 19103-1895

BY: JOSEPH P. DOUGHER, ESQ. Attorneys for Plaintiff

TATE & TATE

The Lexington Building, Suite 5

180 Tuckerton Road

Medford, New Jersey 08055

(856) 983-8484 - (800) 636-8283


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2 (Pages 2 to 5)

Page 2

1 APPEARANCES CONTINUED:2

MORGAN, LEWIS & BOCKIUS, LLP3 1701 Market Street

Philadelphia, PA 19103-2 9214 BY: ANDREW C. WHITNEY, ESQ.

Attorneys for Leonard Becker,5 Michael R. DeLuc a, Harold E. Suss man,

Jerom e Miller, Warr en Palitz,6 Jeffrey Steinberg7

SAUL EWING , LLP8 1500 Market Street, 38th Floor

Philadelphia, PA 191029 BY: GREGORY G. SCHWAB, ESQ.

Attorneys for BDO Seidman, LLP10

11 DECHERT, LLP Cira Center

12 2929 Arch Street Philadelphia, PA 19104-2 808

13 BY: MICHAEL L. KICHLINE, ESQ. Attorneys for J.P. Morgan Chase Bank; J.P.

14 Morgan Securities, Inc.; J.P. Morgan Chase & Co.; Bear Stearns & Co., Inc.;

15 Bear Stearns Financial Products, Inc.; Bear Stearns Asset Backed Securities, Inc.;

16 Morgan Stanley & Co., Incorporated; Morgan Stanley Dean Witter & Co.; Morgan Stanley

17 ABS Capital I, Inc .; and Morgan Stanley

Mortgage Capital, Inc .18

19 HARKINS CUNNINGHAM, LLP 2800 One Commerce Square

20 2005 Market Street Philadelphia, PA 19103

21 BY: ELIZABETH M. CHACHIS, ESQ. (Via Telephone)

22 Attorneys for Blank Rome, LLP23

24

25

Page 3

1 WILMER, CUTLER, PICKERING, HALE & DORR, LLP 399 Park Avenue

2 New York, NY 10022

BY: DOUGLAS F. CURTIS, ESQ.3 MICHELLE GOLDI S, ESQ.

SANKET J. BULSARA, ESQ.

4 Attorneys for Credit Suisse (USA), Inc.; Credit Suisse First Boston; Credit Suisse

5 First Boston Mortgage Secu rities Corp.; and Credit Suisse First Boston Mortgage

6 Capital, LLC7

CREDIT SUISSE SECURITIES (USA), LLC8 1 Madison Avenue

New York, NY 100109 BY: DEBORAH BURSTEIN, ESQ.

Attorneys for Credit Suisse (USA), Inc.;10 Credit Suisse First Boston; Credit Suisse

First Boston Mortgage Secu rities Corp.;11 and Credit Suisse First Boston Mortgage

Capital, LLC12

13 MORVILLO, ABRAMOWIT Z, GRAND, IASON, ANELLO & BOHRER, P.C.

14 565 Fifth Avenue New York, NY 10017

15 BY: RICHARD D. WEINBERG, ESQ.

Attorneys for Victor Hong16

17 ALSO PRESENT:18

Mr. Lee Bitman19 Expert Legal Video Produc tions

6 East Kings Highw ay20 Haddonfield, NJ 08033

(856) 354-600021

22

23

24

25

Page 4

1 I N D E X2 WITNESS PAGE3 VICTOR HONG4 EXAMINATION BY MR. COREN.............5, 1615 EXAMINATION BY MR. SCHWAB............. ..1546 EXAMINATION BY MR. CURTIS...............1547

8 E X H I B I T S9 EXHIBIT PAGE10 Exhibit S-74.....................................141

Exhibit S-75.....................................14111 Exhibit S-76.....................................145

Exhibit S-77.....................................14612 Exhibit S-78.....................................14713 Exhibit S-79.....................................14814

15 EXHIBITS PREVIOUSLY MARKED AND REFERRED TO:16 Exhibit S-1.......................................67

Exhibit S-3.......................................7917 Exhibit S-17......................................83

Exhibit S-18......................................8418 Exhibit S-19.....................................132




Exhibit S-62.....................................15222

23 REQUESTS TO PRODUCE:24 Page 45, Line 1325

Page 5

1 THE VIDEOGRAPHER: Your Honor, we are

2 now on the video record . My name is Lee Bitman and

3 I represent Expert Legal Video Productions. Today's

4 date is June 27th, year 2008. We're at the law

5 offices of Wilmer Hale, located at 399 Park Avenue

6 in New York, New York.

7 We are here in the matter of George L.

8 Miller, Trustee of the Bankruptcy Estate of American

9 Business Financial Services, Inc., verse Anthony J.

10 Santilli, et al, which is filed in the Court of

11 Common Pleas, Philadelphia County, Pennsylvania. It

12 is a July term, 2006, and the case number is 1225.

13 Present for videotape deposition is the

14 witness, Victor Hong.

15 Our court reporter today is Robert Tate of

16 Tate & Tate Reporting of Medford, New Jersey. At

17 this point will the court reporter kindly swear in18 the witness.

19 VICTOR HONG, having been duly sworn,

20 was examined and testified as follows:

21 THE VIDEOGRAPHER: It is now 8:13 a.m.

22 and we will begin with ques tioning.

23 BY MR. COREN:

24 Q. Goo d morning, Mr. Hong. Would you please

25 state your full name and spell your last name for


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3 (Pages 6 to 9)

Page 6

1 the record.

2 A. Victor Hong, H-O-N-G.

3 Q. And, Mr. Hong, my name is Steve Coren. I

4 represent the Trustee, George Miller, in connection

5 with litigation pending in the Court of Common Pleas

6 of Philadelphia County, Pennsylvania.7 THE VIDEOGRAPHER: We're now going off

8 the video record , 8:13.

9 (Brief pause.)

10 THE VIDEOGRAPHER: 8:14, back on the

11 video record.

12 BY MR. COREN:

13 Q. Before the phone rang, I introduced myself

14 as counsel for the Trustee. You are here today to

15 give testimony under oath in connection with

16 litigation brought by Trustee Miller against your

17 former employer and others. If at any time you

18 don't understand a question, you want me to repeat

19 it, please tell me. It's important that you

20 understand the question and that you are in fact

21 attempting to honestly answer the question that I

22 have pos ed.

23 If at any time during the day you recall

24 something that you hadn't remembered earlier, please

25 feel free to tell me. You can go back at any time

Page 7

1 that you would l ike and correct any answer you made

2 or supplement any testimony that you gave. If you

3 think it appropriate, please feel free to tell us

4 and we'l l give you that oppor tunity. Is that fair,

5 sir?

6 A. Yes.

7 Q. Where do you currently reside?

8 A. 222 East 34th Street, New York City.

9 Q. And by whom are you presently employed?

10 A. J.P. Morgan.

11 Q. And for how long have you been employed by

12 J.P. Morgan?

13 A. Since June of '06.

14 Q. And what is your position with J.P. Morgan?

15 A. Valuation risk management.

16 Q. And are you an officer at J.P. Morgan?

17 A. Can you be more -- can you define that?18 Q. Well, do you have a title, vice president,

19 something like --

20 A. Executive director.

21 Q. Executive director? And so, you are the

22 executive d irector of risk management or valuation

23 risk management?

24 A. Valuation risk.

25 Q. And what does that department do?

Page 8

1 A. Price verification.

2 Q. And when you say price verification, what

3 does that mean?

4 A. Providing independent opinion about the

5 market representativeness of trading inventory

6 valuations.7 Q. And what types of -- when you say trading

8 inventory, what do you mean?

9 A. Mortgage and asset-backed securities.

10 Q. And when you say price evaluation, what do

11 you mean?

12 A. Valuation by -- by whom? It would be --

13 there are various parties that are involved in

14 valuation of any given trading position. Are you

15 talking about my role or somebody else's role?

16 Q. Yes, your role, please.

17 A. My role is to assess independently if

18 trader marks are at fair market value.

19 Q. And a trader mark is the value of a20 particular asset that is set by the trader?

21 A. Yes.

22 Q. Have you ever testified before?

23 A. Not that I can recall. Not that I can

24 recall.

25 Q. And can you tell me what preparation, if

Page 9

1 any, you've done for this deposition?

2 A. Meeting with counsel.

3 Q. And with whom did you meet?

4A. Richard Weinberg and Wilmer Hale.5 Q. Anyone else?

6 A. No.

7 Q. And when did you meet?

8 A. During the last few weeks.

9 Q. And for how long did you meet?

10 A. About three or four times, I believe, about

11 three-hour sessions each.

12 Q. So, you met for more than 10 hours with

13 counsel to prepare for this deposition; is that

14 correct?

15 A. I believe so.

16 Q. And did you review any materials?

17 A. Yes.18 Q. Do you recall what you reviewed?

19 MR. CURTIS: Objection.

20 Q. You can answer the question.

21 A. Yes.

22 Q. And what did you review?

23 MR. CURTIS: Objection. That's work

24 product.

25 MR. COREN: Are you instructing him


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4 (Pages 10 to 13)

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1 not to answer?

2 MR. CURTIS: I would instruct him not

3 to answer.

4 Q. But for the instruction of counsel, could

5 you identify the documents that you reviewed in

6 preparation?7 A. I believe so.

8 Q. Do you recall the quantity of documents?

9 A. Not specifically.

10 Q. More than 10?

11 A. As I can recall, likely more than 10.

12 Q. Okay. Did you speak with any of your

13 former colleagues at Credi t Suisse in connection

14 with this deposition?

15 A. Yes.

16 Q. And with whom did you speak?

17 A. Jane Tang, Steve Kelly, Michael Sopher, Dan

18 Ezra.

19 Q. What was Dan's last name?

20 A. Ezra. Gail Lee . Those are names that I

21 can recall.

22 Q. And when did you have these discussions

23 with those five former colleagues who were at Credit

24 Suisse?

25 MR. WEINBERG: That's a discussion

Page 11

1 about the deposition you are asking about?

2 MR. COREN: Yes.

3 A. What was the question again?

4 Q. Yes. I had asked you whether you had

5 consulted or discussed your upcoming deposition with

6 any of your former colleagues at Credit Suisse and

7 you gave me five names.

8 A. Oh. I'm mistaken. I didn't discuss the

9 deposition. I discussed, because they asked me,

10 because I was in the paper.

11 Q. Okay. You're referring to the article in

12 the Wall Street Journal?

13 A. Yes.

14 Q. And did they contact you after seeing your

15 name in the Wall Street Journal?

16 A. I don't recall specifically. I may have

17 contacted them or they may have contacted me.18 Q. Tell me what you recall having discussed

19 with those individuals as a result of your name

20 having appeared in the Wall Street Journal ar ticle.

21 A. I acknowledged that I was in the article,

22 but I didn't discuss anything of substance, as I

23 recall.

24 Q. With any of the five people you have

25 identified, did you discuss anything of substance?

Page 12

1 A. No.

2 Q. Do you recall anything they said about your

3 name having been in that Wall Street Journal

4 article?

5 A. Nothing specific.

6 Q. Did you speak with the Wall Street Journal7 reporter?

8 A. I rece ived a phone call from the Wall

9 Street Journal reporter.

10 Q. And did you speak to him?

11 A. Yes.

12 Q. And what did you tell him?

13 A. I said that I had nothing to say regarding

14 the article.

15 Q. Did he call you before it was published?

16 A. Yes, he did.

17 Q. And did he ask you to comment on what was

18 about to be published?

19 A. Yes, he did.

20 Q. Do you recall what he asked you?

21 A. He asked, if I recall correctly, if I had

22 any knowledge this year regarding an article that he

23 was going to write.

24 Q. And you told him you had no comment?

25 A. Yes.

Page 13

1 Q. Would you please give me your educational

2 background.

3 A. University of Chicago, MBA, 1985;

4 University of Wisconsin, BA, 1981; and then Lane

5 Technical High School, 1977.

6 Q. How old are you?

7 A. 49 and a half.

8 Q. Any degrees beyond your MBA?

9 A. CFA and then, that's a designation, plus

10 FRM, which is financial risk management.

11 Q. CFA is what?

12 A. Chartered financial analyst.

13 Q. And when did you receive that designation?

14 A. I believe in 1992 .

15 Q. And the other one you identified?

16 A. I believe it was 2006 .

17 Q. Would you please give us your employment18 experience after you received your MBA from

19 University of Chicago.

20 A. Sure. I came out of the University of

21 Chicago in June of 1985, started in a training

22 program at Chemical B ank, resigned that to take a

23 job at Sa lomon Brothers in 1985.

24 Q. Would you just briefly describe what your

25 positions were at Chemical Bank and Salomon


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5 (Pages 14 to 17)

Page 14

1 Brothers.

2 A. At Chemical Bank, I was just a trainee.

3 Q. Training for what?

4 A. Sales and trading.

5 Q. And at Salomon Brothers?

6 A. Government bond trader.7 Q. Were you actually a trader for Salomon

8 Brothers?

9 A. Yes.

10 Q. And you were trading government bonds?

11 A. Yes.

12 Q. Were you trading any other types of

13 securities?

14 A. No.

15 Q. And for how long did you hold your position

16 as a bond trader at Salomon Brothers?

17 A. Until the beginning of 1988.

18 Q. And what did you do next?

19 A. I joined Security Pacific out in Los20 Angeles, California.

21 Q. And what was your position with Security

22 Pacific?

23 A. Government bond trader.

24 Q. For how long did you hold that position?

25 A. I believe until October of 1988.

Page 15

1 Q. And what did you do next?

2 A. I took a position at Continental Bank in

3 Chicago to be a government bond trader.

4 Q. And how long did you hold that position?

5 A. Until I believe, I think it was September

6 of 1989.

7 Q. And what did you do after that?

8 A. I decided to make a career change and took

9 a position with a lease finance firm to be a lease

10 finance analyst.

11 Q. What firm was that?

12 A. Forsythe MacArthur.

13 Q. Located where?

14 A. Skokie, Illinois.

15 Q. And tell me what the nature of that

16 position was.

17 A. It was structuring, analyzing and marketing18 lease finance transactions.

19 Q. And what type of lease finance transactions

20 were being structured and marketed, leases of what?

21 A. Typically computer and telec om equipment.

22 Q. And were they being securitized and

23 securities marketed and sold?

24 A. Not of which I knew.

25 Q. I'm sorry?

Page 16

1 A. Not of which I knew.

2 Q. Well, what was the purpose of structuring

3 those financings?

4 A. For sale to institutional investors.

5 Q. And for how long did you do that?

6 A. I did that for about a year.7 Q. And what did you do next?

8 A. I joined Kidder Peabody in 1991.

9 Q. And what did you do at Kidder Peabody?

10 A. A government bond salesperson.

11 Q. And for how long did you hold that

12 position?

13 A. Until I believe August of 1992.

14 Q. And what did you do after that?

15 A. Bear Stearns recruited me at the end of

16 1992.

17 Q. And what was your position at Bear Stearns?

18 A. Fixed income rese arch.

19 Q. And what did the -- what did your position

20 involving fixed income research entail while at Bear

21 Stearns?

22 A. Covering the treasury mortgage-backed

23 securities markets.

24 Q. And what did you do, when you say covering,

25 what do you mean?

Page 17

1 A. Identify relative value trade opportunities

2 and publish research.

3 Q. And were these mortgage-backed securities

4 conventional mortgages, subprime mortgages or both?

5 A. Typically, they would be agency mortgages,

6 Fannie Mae, Freddie Mac, Ginnie Mae.

7 Q. And were you involved in structuring pools

8 of those mortgages and valuing the securities that

9 resulted?

10 A. I was not involved in structuring. When

11 you say valuing, what do you mean, in what sense?

12 Q. Well, you were involved in pricing of those

13 securities?

14 A. No. I was a price taker, not a price

15 maker.

16 Q. And what does that mean, price taker?

17 A. I was not assigning values for any books18 and records or any other purposes. I was -- part of

19 my role was to determine if some securities offer

20 particular relative value opportunities that would

21 enable trade ideas to be marketed to clients.

22 Q. For how long did you hold that position?

23 A. Four years.

24 Q. Now, in that position while you were at

25 Bear Stearns, did you become familiar w ith how


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6 (Pages 18 to 21)

Page 18

1 mortgage-backed securities were valued?

2 A. Yes.

3 Q. And what did you learn about that?

4 A. Can you more specific?

5 Q. Yes. Prior to joining Bear Stearns, had

6 you had any opportunity to become familiar with the7 valuation process as relates to mortgage-backed

8 securities?

9 MR. WEINBERG: I'm sorry. That was

10 prior to joining Bear Stearns?

11 MR. COREN: Yes, right.

12 A. Yes.

13 Q. Tell me when was the first time you first

14 became familiar w ith the methodologies used to value

15 mortgage-backed securities.

16 A. In graduate school.

17 Q. And what did you learn in graduate school

18 about the methodologies used to value

19 mortgage-backed securities?

20 A. The valuation was based on evaluating the

21 prepayment opportunities of the underlying home

22 borrowers.

23 Q. Anything else you learned in graduate

24 school?

25 A. That's what I recall.

Page 19

1 Q. Let me dial forward to 1992 and then the

2 four years you spent at Bear Stearns. Tell me what

3 you learned about the methodologies used to value

4 mortgage-backed securities while you were in that

5 position for four years.

6 A. I learned about prepayment modeling and

7 also the types of securities that could be

8 structured from mortgage loan pools.

9 Q. Anything else that you can recall?

10 A. No, not right now.

11 Q. While you were at Bear Stearns, did you

12 have familiarity with the valuation of subprime


14 A. Not that I recall.

15 Q. When was the first time that you had some

16 familiarity or involvement with valuation issues

17 involving subprime mortgage-backed securities?18 A. At CS First Bos ton.

19 Q. Let me back up while you' re still at Bear

20 Stearns and talk a little bit about the

21 methodologies that you learned for the valuation of

22 mortgage-backed securities. You identified

23 prepayment modeling. What d id you mean by that?

24 A. Understanding how underlying home borrowers

25 may elect to refinance their mortgages either

Page 20

1 because they are moving or because they have found

2 cheaper loans as replacements.

3 Q. And how did the prepayment of the

4 underlying mortgage loans affect the value of a

5 mortgage-backed security?

6 A. If homeowners would prepay with greater7 propensity, then the underlying loans would have

8 shorter effective maturities.

9 Q. And how does that impact the value of a

10 security which is an interest in a pool of

11 underlying mortgages?

12 A. Can you be more specific?

13 Q. Well , you were not valuing the underlying

14 mortgages, as I understand it. The model is valuing

15 securities which constitute an interest in a pool of

16 underlying mortgages. Is that correct?

17 A. I'm valuing the securities that are based

18 off of the cash flows from the mortgage pools.

19 Q. Right. And how does the prepayment of the

20 underlying mortgage pool impact the cash flows from

21 that pool and the ultimate value of the security?

22 A. It accelerates the timing of the cash

23 flows.

24 Q. And does that have an inverse relationship;

25 the higher the prepayment speed, the lower the value

Page 21

1 of the security?

2 A. Not necessarily.

3 Q. When the security is an interest-only strip

4 and no interest and principal repayment, would my

5 statement be cor rect?

6 A. Could you repeat that?

7 Q. Yes. If the security, if the security that

8 we are addressing is a right only to receive

9 interest, can we agree that the -- there is an

10 inverse relationship between the prepayment speed

11 and the value of that security in the sense that the

12 faster the prepayment speed, the lower the value of

13 the interest-only mortgage-backed security?

14 A. Yes.

15 Q. Did you actually work with models while you

16 were at Bear Stearns, valuation models?

17 A. Yes, we applied valuation models.18 Q. Was there a standard type model that was

19 used at Bear Stearns, or was this something that

20 Bear Stearns had prepared on its own?

21 MR. CURTIS: Objection to form.


23 A. Could you repeat that, please?

24 Q. Sure. Do you know who developed the models

25 that you utilized while at Bear Stearns on issues of


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7 (Pages 22 to 25)

Page 22

1 valuing mortgage-backed securities?

2 A. The financial analytic and structured

3 transactions group developed the models, and also,

4 as alte rnative, we would use models on Bloomberg.

5 Q. And did you have an opportunity to actually

6 input assumptions into the models and see how that7 affected the derived values?

8 A. Yes.

9 Q. Were these models run on Excel

10 spreadsheets?


12 Q. Do you recall whether the models had names

13 or identifying marks?

14 A. There was Bloomberg and then there were the

15 Bear Stearns models from the financial analysts and

16 structured transactions group.

17 Q. Were you aware of any, when you were at

18 Bear Stearns, were there any recognized authorities

19 in the field of valuing mortgage-backed securities?


21 Q. Yes. Were there any publications or books

22 that, in connection with your position at Bear

23 Stearns, you believed to have been recognized

24 authorities in the valuation of mortgage-backed

25 securities?

Page 23

1 A. A book that was a compilation of articles

2 and various contributors, and the coordinator of

3 that book is Frank Fabozzi.

4 Q. Do you recall the name of that book?

5 A. Not specifically.

6 Q. Was that a book coauthor by Steve Mann?

7 A. Don't recall.

8 Q. Did you read Mr. Fabozzi's book?

9 A. Yes.

10 Q. Do you still use that book today?

11 A. No.

12 Q. Are there any other books or publications

13 that you have used in your career concerning the

14 valuation of mortgage-backed securities that you

15 considered authoritative?

16 A. There are so many articles that are written

17 that nothing stands out in my mind.18 Q. Have you read any books on the subject

19 other than the one you identified that Mr. Fabozzi

20 authored?


22 Q. Now, I think you indicated you were at Bear

23 Stearns for four years; is that correct?

24 A. Yes.

25 Q. And am I correct that your next position

Page 24

1 was at CS First Boston?

2 A. Yes.

3 Q. When did you start at CS First Boston?

4 A. In late 1996.

5 Q. October 3, 1996 ring a bell?

6 A. Yes.7 Q. Was that your start date?

8 A. Yes.

9 Q. And is it correc t that you were employed by

10 CS First Boston from October 3, 1996, through June

11 30, 2004?

12 A. Yes.

13 Q. Now, what CS or Credit Suisse entity did

14 you work for? And if there was more than one, tell

15 me which ones you worked for.


17 Q. Yes. As I understand it, there are a

18 number of legal entities that are operated by Credit

19 Suisse. Do you know which ones you worked for?

20 A. I wouldn't know the details of it.

21 Q. So, as far as you were concerned, it was

22 just Credit Suisse First Boston?

23 A. (Witness nods head in the affirmative.)

24 Q. Yes?

25 A. Yes.

Page 25

1 Q. And where did you physically work during

2 the period of time you were employed b y Credit

3 Suisse First Boston?

4 A. Initially at Park Avenue Plaza, and then at

5 11 Madison Avenue.

6 Q. Always in Manhattan?

7 A. Yes, but I did do some work in London.

8 Q. And for how long were you at Credit Suisse

9 in London?

10 A. During 2000 , 2001 , I was making regular

11 trips to London, but not specifically domiciled out

12 of there.

13 Q. All right. Did you hold the same position

14 during your entire tenure at Credit Suisse First

15 Boston?

16 A. No.

17 Q. What was the first pos ition you held?18 A. I was the head of the mortgage price

19 verification group.

20 Q. And how many employees were in the mortgage

21 price verification group?

22 A. It varied over time.

23 Q. Give me an estimate.

24 A. I believe it got to as large as like about

25 six to eight people, six to eight persons.


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8 (Pages 26 to 29)

Page 26

1 Q. Six to eight?

2 A. Yes.

3 Q. Okay. And what did that group do?

4 A. Assisted me in the valuation review of the

5 firm's fixed income trading positions.

6 Q. And when you say fixed income trading7 positions, what do you mean?

8 A. RMBS, ABS, CMBS, CDO, leverage loans, high

9 yield debt, investment grade corporate debt, repo

10 finance, interest rate derivatives.

11 Q. Now, were you valuing these various

12 investments that were held or owned by Credit

13 Suisse?

14 A. Yes.

15 Q. So, the investments that you have

16 identified that you were valuing were in the

17 inventory of Credit Suisse and maintained on its

18 balance sheet; is that co rrect?

19 A. Yes.

20 Q. All right. Let me back up and you gave us

21 a bunch of initials. We need to further describe

22 them for the record . RMBS, residential


24 A. Yes.

25 Q. ABS, asset-backed securities?

Page 27

1 A. Yes.

2 Q. CMBS, what did that stand for?

3 A. Customer mortgage-backed securities.

4 Q. CDO?

5 A. Collateralized debt obligations.

6 Q. Leveraged loans?

7 A. Loans to corporations.

8 Q. Investment grade corporate debt?

9 A. Investment grade bonds which corporations

10 issued.

11 Q. Repo finance?

12 A. Facilities where we would finance

13 securities for customers.

14 Q. And I think you said interest rate

15 derivatives?

16 A. Yes. Could be interest rate swaps, could

17 be some exotic credit derivatives.18 Q. Now, for how long were you the head of the

19 mortgage price verification group of Credit Suisse

20 First Boston?

21 A. Until I believe the end of May of '04.

22 Q. Well, you left the company a month later,

23 correct?

24 A. Uh-huh.

25 Q. Did you have a different position for that

Page 28

1 one month?

2 A. Yes.

3 Q. And what was your position for that one

4 month?

5 A. Analyst in CMBS research.

6 Q. CM?7 A. BS.

8 Q. Was that considered a promotion?

9 A. No.

10 Q. Why did you change positions from the head

11 of the mortgage price verification group to an

12 analyst?

13 A. I was asked to consider a role back in

14 research.

15 Q. And who asked you to consider that?

16 A. Gail Lee and -- yeah, that was it, yeah.

17 Q. Did you consider that a demotion?

18 A. No.

19 Q. Did your salary change in connection with20 that change in position?

21 A. No, no.

22 Q. Were you still heading up a group of

23 individuals in connection with that change of

24 position?

25 A. No.

Page 29

1 Q. Did some event occur which resulted in that

2 change of position to your knowledge?

3 A. Could you be more specific?

4 Q. Yes. I'm wondering why it was, after

5 spending a number of years as the head of a group

6 involving mortgage price verification, that you

7 moved to an analyst position. Did something happen

8 to cause that move?

9 A. I was unhappy with Willy Pest and Ed

10 Valencia, my managers.

11 Q. And why is that?

12 A. Whenever I raised valuation concerns, they

13 tended to criticize the work by my team and me.

14 Q. Give me those names again.

15 A. Ed Valencia, Willy Pest.

16 Q. Spell Valencia.

17 A. V-A-L-E-N-C-I-A.18 Q. And the other individual?

19 A. Willy Pest .

20 Q. Willy P-E-S-T?

21 A. Yes.

22 Q. And what was Mr. Valencia's position at CS

23 First Boston?

24 A. He was the head of mortgage product

25 control.


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9 (Pages 30 to 33)

Page 30

1 Q. And how about Willy Pest, what was his

2 posi tion?

3 A. He was the manager for product controllers

4 in product control.

5 Q. Now, you had indicated that whenever you

6 raised valuation questions or concerns, you were7 criticized by Mr. Valencia and Mr. Pest. Do you

8 recall that testimony?

9 A. Do I recall saying that just now?

10 Q. Yes.

11 A. Yes, I do.

12 Q. And tell me if you could more specific in

13 terms of what types of valuations that you would

14 make that would be criticized by Mr. Valencia or Mr.

15 Pest.

16 A. Could you repeat the question?

17 Q. Yes. I'm trying to get a further

18 amplification of the valuations that your group

19 derived that were then criticized by Mr. Valencia

20 and Mr. Pest which caused you to want to leave your

21 director position in that group.

22 A. Yes.


24 Q. Go ahead.

25 THE WITNESS: Pardon? Never mind.

Page 31

1 Q. Yes, go ahead.

2 A. I'm sorry. Could you repeat the question?

3 MR. COREN: Mr. Court reporter.

4 (The reporter read the pending

5 question.)

6 A. My price verification of mortgage trading

7 positions.

8 Q. And is it correct that you were coming up

9 with prices that were lower than what others in the

10 organization were pricing mortgage-backed securities

11 at?

12 A. Yes.

13 Q. And is it also correct that you were

14 po inting out that your group disagreed with the

15 pricing determinations made by others within Cred it

16 Suisse and it was your disagreement that was

17 criticized by your superiors?18 MR. CURTIS: Objection to form.

19 Q. You may answer.

20 A. Yes.

21 Q. Give me some examples that you can recall

22 where your group had determined that mortgage-backed

23 securities should have been priced lower than what

24 others at Credit Suisse were pricing them at.

25 A. CMBS positions which Andy Kimura held.

Page 32

1 Q. CMBS positions which who held?

2 A. Andy Kimura.

3 Q. And is that an employee of Credit Suisse?

4 A. Yes.

5 Q. And what CMBS positions did Andy Kimura

6 hold?7 A. I believe some positions in a deal, it was

8 CSFB 97-C1.

9 Q. And what was that?

10 A. It was a commercial mortgage transaction

11 that First Boston had created in 1997.

12 Q. And did that in any way involve


14 A. Yes.

15 Q. And did it involve subprime mortgage-backed

16 securities?

17 A. No.

18 Q. And tell me what that was about where you

19 derived values that were lower than Mr. Kimura and

20 you were criticized as a result.

21 A. I came up with an estimated value which I

22 believed to be -- which was lower than where the

23 trader was marking.

24 Q. How much lower?

25 A. Approximately 40 percent lower.

Page 33

1 Q. And did you detail your valuation

2 disagreements in any writing?

3 A. Yes, I did.

4 Q. And if I were to try to find that writing,

5 what would I look for?

6 A. Communications to Andy Kimura, the CMBS

7 traders.

8 Q. Do you recall the date?

9 A. No, not exactly.

10 Q. Can you recall the month or the year?

11 A. Most likely, March or April of 2004.

12 Q. All right. And when you cri ticized the

13 valuations and derived a value which was 40 percent

14 lower, what was the reaction of your superiors?

15 A. They questioned my work.

16 Q. Could you be more specific?

17 A. They asked if I knew if my valuation was18 accurate.

19 Q. And did you believe your valuation was

20 accurate?

21 A. Yes.

22 Q. And did you defend your valuation to your

23 superiors?

24 A. Yes.

25 Q. And then what, if any, response did you get


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10 (Pages 34 to 37)

Page 34

1 from your superiors after defending the value -- the

2 accuracy of your valuation?

3 A. They asked me to sign off on the trader

4 valuation being correct.

5 Q. And what did you say?

6 A. I said I was not comfortable with that.7 Q. And what was their response?

8 A. They said they would try to take care of

9 the matter.

10 Q. What did you understand that to mean?

11 A. I don't -- you would have to ask them. I

12 mean, I -- that was what they said to me.

13 Q. Did you feel that you were being threatened

14 or pressured in connection with arriving at a

15 different value than the trader had set for a

16 particular security?

17 A. Yes.

18 Q. And why did you feel you were being

19 pressured or threatened?20 A. I was told not to let auditors or

21 regulators discuss the matter.

22 Q. You were told to keep it a secret from

23 auditors or regulators; is that correct?

24 A. I don't recall that specific word "secret"

25 being used.

Page 35

1 Q. Were you told not to discuss it with

2 auditors or regulators?

3 A. Yes.

4 Q. And who told you that?

5 A. Willy Pest and Ed Valencia.

6 Q. And did they tell you that on more than one

7 occasion?

8 A. Yes.

9 Q. On how many occasions?

10 A. I recall more than one.

11 Q. And when they -- when you felt threatened

12 or pressured not to disclose your disagreements as

13 to value with auditors or regulators, did you

14 communicate that to anyone else within CS First

15 Boston?

16 A. I elevated to Dan McHugh.

17 Q. Spell that.18 A. Dan and then M-C capital H-U-G-H.

19 Q. And what posi tion did Dan McHugh have at CS

20 First Boston?

21 A. He was Ed Valencia's manager.

22 Q. And what did Mr. McHugh say in response

23 when you told him that you were being threatened or

24 pressured not to disclose valuation disagreements

25 with auditors or regulators?

Page 36

1 A. Let me think. It's difficult to recall

2 exactly what he said.

3 Q. Give me your impression or best sense of

4 what he said.

5 MR. WEINBERG: Objection to form.

6 Q. You can answer.7 MR. WEINBERG: You want in substance

8 his best recollection?

9 MR. COREN: Yes.

10 A. To leave the matter alone.

11 Q. He told you to leave it alone?

12 A. As I recall.

13 Q. Did you feel as though he was threatening

14 or pressuring you?

15 A. Yes.

16 Q. And did you leave the matter alone?


18 Q. Well, when you elevated your disagreements

19 about valuation and the fact that you were told not20 to share those disagreements with regulators or

21 auditors and then you were told by Valencia's boss

22 to leave it alone, did you feel as though Mr.

23 Valencia's boss was also threatening or pressuring

24 you not to disclose your valuation disagreements

25 with auditors or regulators?

Page 37

1 A. I'm sorry. Just there were so many layers

2 that I perceive in your question.

3 Q. Let me try it again. You elevated to Mr.

4 Valencia's boss the fact that you were being

5 threatened or pressured not to discuss disagreements

6 over valuation with auditors or regulators, correct?

7 A. Yes.

8 Q. And you felt as though Mr. McHugh, who was

9 Mr. Valencia's boss, was also pressuring you or

10 threatening you not to disclose those valuation

11 disagreements with auditors or regulators, correct?

12 A. Yes.

13 Q. And in light of that what you perceived to

14 be threa t or pressure from Mr. McHugh, what i f

15 anything did you do?

16 A. I recall discussing my wish to take a

17 sabbatical or to leave the firm and to find a18 different position with HR.

19 Q. Who did you discuss that with at HR?

20 A. Stephanie Diamond.

21 Q. Diamond?

22 A. Yes. And I believe Liarne Edmunds.

23 Q. I'm sorry. The last?

24 A. Liarne Edmunds.

25 Q. Liarne Edmunds?


11/60



11 (Pages 38 to 41)

Page 38

1 A. Spelled L-I-A-R-N-E.

2 Q. And what did -- they were in the HR

3 department?

4 A. Yes.

5 Q. And what did they say?

6 A. They said that they perceived that Willy7 and Ed were not being supportive of the work that I

8 did.

9 Q. Well, did they say it was okay to take a

10 leave of absence or a sabbatical?

11 A. I don't recall them saying yes or no, but

12 they knew that I wanted to discuss the matter with

13 HR.

14 Q. And was that close in time to when you left

15 your director posi tion and moved over to being an

16 analyst about a month before you left the company?

17 A. Yes.

18 Q. Did you share your valuation concerns and

19 the threats and pressure that had been made against

20 you with any other individuals at the company?

21 A. Can you repeat the question?

22 Q. Sure. You have identified the fact that

23 you felt threatened and pressured by Valencia, Pest,

24 Valencia's boss, Dan McHugh, and that you then went

25 to the HR department, expressed your dissatisfaction

Page 39

1 and suggested perhaps you needed a sabbatical or you

2 were going to leave the company, correct?

3 A. Yes.

4 Q. Did you go to anyone else, any person in a

5 higher pos ition than Mr. McHugh and express your

6 concerns that you were being pressured or threatened

7 not to discuss valuation disagreements with

8 regulators o r auditors?


10 Q. Did Mr. McHugh or anyone else tell you what

11 they would do to you if you discussed your valuation

12 disagreements with regulators or auditors?


14 Q. Yes. Did Mr. Valencia, Mr. Pest or Mr.

15 McHugh tell you what they would do to you if you

16 discussed your valuation disagreements with auditors

17 or regulators?18 A. Yes.

19 Q. What did they tell you would happen?

20 A. We were told that if we uncovered

21 additional behavior that see med inappropriate,

22 inappropriate trader behavior, that might damage the

23 firm reputationally, that our careers and our

24 reputations would be in jeopardy.

25 Q. Threatened to fire you?

Page 40

1 A. Not that I recall specifically.

2 Q. Well, did you understand from what he said

3 that if you d isclosed d isagreements about

4 valuations, that you would be fired; is that what

5 you understood?

6 A. Yes.7 THE WITNESS: Can I take a break?

8 MR. WEINBERG: Sure.

9 MR. COR EN: Take five.

10 THE VIDEOGRAPHER: We're now going off

11 the video record. It's now 9:01.

12 (Brief recess .)

13 THE VIDEOGRAPHER: We're now back on

14 the video record. It's now 9:21.

15 BY MR. COREN:

16 Q. Mr. Hong, before our break, you were

17 providing some tes timony concerning your group 's

18 disagreements with valuation determinations made by

19 a particular trader that you identified as Andy

20 Kimura. In what group was Mr. Kimura?

21 A. Mortgag e trading.

22 Q. And did Mr. Kimura trade subprime

23 mortgages?


25 Q. And you I think had indicated at one point

Page 41

1 that you were criticized, meaning more than just

2 you. Was the criticism directed to the entire group

3 that you directed?


5 Q. Yes. I think in one of your questions

6 about being criticized about the disagreements that

7 you had over value, you referred to it as "we"

8 rather than just you, and I'm trying to see whether

9 or not there were other members of your team that

10 were either pressured or threatened or criticized as

11 a result of having determined that the values that

12 your group placed on assets were substantially lower

13 than the values that the traders had placed on those

14 assets.

15 A. I was not the only one to get criticism

16 within my group.

17 Q. Yes. Who else was criticized within your18 group?

19 A. We were refe rred to as a group in terms of

20 price verification.

21 Q. Right. But can you identify the other

22 individuals within your group who was -- who were

23 criticized, the names of those individuals?




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12 (Pages 42 to 45)

Page 42

1 A. I interpreted it as to the other people who

2 were then at -- within my group, Amir Suja, Jane

3 Tang, Franklin Yap, Usman Babar, Michael Sopher,

4 Stephen Kelly. Those names come to mind as a group

5 reference.

6 Q. And did you speak with the members of your7 group relating the criticism that you received and

8 the threats and the pressure that you received?

9 MR. CURTIS: Objection.

10 MR. WEINBERG: Objection to form. You

11 can answer.

12 A. Yes.

13 Q. And tell me what you recall telling the

14 members of your group on those subjects.

15 A. I recall telling them that we just have to

16 do our work correctly and be able to defend our

17 work.

18 Q. And did you tell your group that you were

19 told that if you discovered any additional problems

20 with respect to values, that you were going to be

21 fired?

22 MR. WEINBERG: Objection to form. No

23 foundation.



Page 43

1 Q. Sure. Did you tell your group that you

2 were told that if you discovered any additional

3 problems with respect to values that you were going

4 to be fired?

5 A. Not in those specific terms.

6 Q. Well, tell me in general what you told your

7 group on that subject.

8 A. My group had approached me to say that they

9 did not feel as if their work was being supported.

10 Q. Did they tell you that they felt pressured?

11 A. Yes.

12 Q. And who in your group approached you and

13 told you that they were feel ing pressured on

14 questions of valuation?

15 A. Amir Suja, that's one I recall.

16 Q. And can you tell me what you recal l about

17 that?18 A. Ed Valencia had a conversation with Amir

19 Suja and me expressing his unhappiness with the

20 discove ry of valuation concerns.

21 Q. And what did Mr. Valencia say in that

22 conversation with you and your colleague?

23 A. That if we were to uncover additional

24 valuation issues, that we would be held responsible.

25 Q. That you would be held responsible?

Page 44


2 Q. And your group?


4 Q. What did you -- yes, yes?

5 A. Yes.

6 Q. What did you understand that to mean?7 A. That our caree rs were under scrutiny.

8 Q. When did that conversation take place?

9 A. I believe in March of '04.

10 Q. And there were three of you present during

11 that conversation?

12 A. Ed Valencia and I were in, in our office ,

13 and we had dialed into Amir Suja on his cell phone,

14 who was traveling.

15 Q. Did you make any notes of that

16 conversation?


18 Q. Now, when he said your -- what did you

19 understand when you said your careers were under

20 scrutiny; what did you mean by that?

21 A. That we were being held accountable if we

22 were to uncover additional valuation concerns.

23 Q. And did you understand that to mean that if

24 you uncovered additional va luation concerns, that

25 you or other members of your group would be fired?

Page 45

1 A. Yes.

2 Q. Did you take any memos or notes with you

3 when you left Credit Suisse?

4 A. Yes.

5 Q. What did you take with you?

6 A. I sent some copies of some e-mails to my

7 personal e-mail account regarding my elevation of

8 the Andy Kimura valuations.

9 Q. And do you still have those e-mails?

10 A. I believe so.

11 Q. Where are they?

12 A. I may have them printed out somewhere.

13 MR. COREN: Would you please save

14 those and not destroy them from this point fo rward.

15 MR. WEINBERG: We'll consider the

16 request.

17 Q. Anything else that you took with you?18 A. Let me think here right now.

19 Q. I'm sorry?

20 A. Let me think here.

21 THE WITNESS: Can I talk to you one

22 second? Is that okay?

23 MR. WEINBERG: He wants to consult

24 with me for a second.

25 MR. COREN: Off the record.


13/60



13 (Pages 46 to 49)

Page 46

1 THE VIDEOGRAPHER: We're now going off

2 the video record , 9:31.

3 (Discussion held between the witness

4 and his counsel.)


6 the video record . It's now 9:36. This begins tape7 number 2 of the videotape deposition of Victor Hong.

8 BY MR. COREN:

9 Q. Are you able to answer my last question?

10 A. Could you repeat it?

11 Q. Yes. You had identified having taken with

12 you copies of s ome of the e-mails that you had s ent

13 regarding elevating the issues involving the trader

14 Mr. Kimura. I asked you whether there was anything

15 else that you took with you. You wanted to consult

16 with your counsel. You have done so. Can you

17 please answer my ques tion?


19 Q. Nothing else you recall. Do you recall

20 what you left there in terms of files?

21 A. Just my, all of my work was done

22 electronically, so just my work, work files and my

23 e-mails.

24 Q. Did you ever make any notes or memos of the

25 events that we've covered so far where you were

Page 47

1 discovering pricing problems that you were bringing

2 to the attention of superiors and being either

3 pressured or threatened; did you make any notes of

4 any of that?

5 A. I was just -- I was --

6 Q. No?

7 A. No.

8 Q. Did you ever bring it to the attention of

9 any attorneys within Credit Suisse?

10 A. I don't recall.

11 Q. Did you maintain a computer or a directory

12 within a network that had your files and e-mails on

13 it?


15 Q. Yes.

16 MR. WEINBERG: I don't understand --

17 I'm not sure what you're asking either.18 Q. Yes. If I wanted to make a request for all

19 of your computer files and e-mails during the period

20 of time you were a t Credit Suisse, what would I ask

21 for, other than just all of your files and e-mails?

22 Is there some directory, some network, some location

23 I should direc t people to to find that information?

24 A. The -- my team kept our work on a shared

25 drive. It was I believe the address is

Page 48

1 K:\quantgroup.

2 Q. Quantgroup?

3 A. Yes.

4 Q. Quantity group or just quant?

5 A. Quant.

6 Q. Q-U-A-N-T?7 A. Uh-huh.

8 Q. Now, you had identified disagreements with

9 values between your group and the trader Andy

10 Kimura. Did you have any disagreements with any

11 other traders on the subject of valuation?

12 A. Yes.

13 Q. What other traders?

14 A. Mitch Lev ine.

15 Q. Spell the last name.

16 A. L-E-V-I-N-E.

17 Q. Anyone else?

18 A. Michael Flannelly.

19 Q. How do you spell Flannelly?20 A. F-L-A-N-N-L -- I'm sorry,

21 F-L-A-N-N-E-L-L-Y, I believe.

22 Q. Any other traders?

23 A. Aamer Abdullah.

24 Q. Could you -- I'm sorry. I'm having a hard

25 time hearing you.

Page 49

1 A. Aamer Abdullah.

2 Q. Spell the last name.

3 A. A-A-M-E-R, A-B-D-U-L-L-A-H.

4 Q. Any other traders?


6 Q. How about Gary Richter?

7 A. I -- I don't recall a Gary Richter.

8 Q. Let's start with Mitch Levine. What did he

9 trade, what types of securities?

10 A. Mortgage-backed securities.

11 Q. And were they subprime mortgage-backed

12 securities?


14 Q. And what was your disagreement with trader

15 Levine on the subject of valuing mortgage-backed

16 securities?

17 A. My team and I were unable to substantiate18 the marks of some securities.

19 Q. And when you say your team was unable to

20 substantiate the marks of some securities, does that

21 mean that your team came up with a different value

22 for those securities than what that trader had

23 valued the securities at?

24 A. Yes.

25 Q. And do you recall how -- and I take it that


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14 (Pages 50 to 53)

Page 50

1 your team determined that those securities w ere

2 valued lower than what trader Levine had valued them

3 at; is that correct?

4 A. That is correct.

5 Q. How much lower did your team determine that

6 those securities were valued at?7 A. I don't recall the exact dollar numbers.

8 Q. Do you recall a level of magnitude? Before

9 you said the discrepancy between you, the value of

10 your group and the value of Andy Kimura was a 40

11 percent difference. Can you put it in the context

12 in terms of your group's dispute with the valuation

13 determinations of trader Levine?

14 MR. CURTIS: Objection to the

15 characterization.


17 A. Depending upon the security, anywhere from

18 10 percent to -- to maybe 50 percent difference.

19 Q. So, your group's values were anywhere from

20 10 percent to 50 percent lower than the values that

21 trader Levine had set those securities at?

22 A. Yes, we estimated their values, they were

23 below trader marks.

24 Q. And the trader mark is the value set by the

25 trader?

Page 51

1 A. Yes.

2 Q. Now, your dispute or disagreement with Mr.

3 Levine, was that with respect to one particular

4 security or multiple securities?

5 A. Multiple.

6 Q. Tell me which securities you recal l

7 disagreeing with trader Levine as to the valuation.

8 A. I do not recall specifically.

9 Q. Do you recall how many there were,

10 different types of securities?

11 A. No.

12 Q. Do you recall when, the time period when

13 you had these disputes or d isagreements?

14 A. October 2003. I'm -- yeah, about October

15 2003.

16 Q. And did you communicate your disagreements

17 to Mitch Levine or anyone else?18 A. Yes.

19 Q. To whom did you communicate your

20 disagreement as to the value?

21 A. Mitchell Levine, Andy Kimura, Ed Valencia,

22 Sal Conti, Joanne Pace .

23 Q. And do you recall what response, if any,

24 that you received from any of these individuals that

25 you have just identified to whom you communicated

Page 52

1 your disagreement with the values set by Mr. Levine?

2 A. The people who rece ived the communications

3 wanted to understand the accuracy of our pricing

4 assumptions and market data that we used to price

5 verify.

6 Q. And did you enlighten them on the7 assumptions and market data that you were using to

8 derive lower values than what trader Levine was

9 setting values at?

10 A. We presented it to eve ryone.

11 Q. And what did they say in response?

12 A. Afte r much revie w, our information was

13 accepted as being reasonable and accurate.

14 Q. So, as relates to Mr. Levine, did they

15 change the values that he had set for securities?

16 A. Yes.

17 Q. Did you receive any threats or pressures

18 relating to your disagreements over the values set

19 by Mr. Levine?


21 Q. Yes. Did you receive any threats or

22 pressures as a result of your disagreements with the

23 values se t by Mr. Levine?

24 A. I don't recall threats. I do recall

25 pressure to be particularly accurate and documented

Page 53

1 and thorough.

2 Q. And did you believe your group to have been

3 accurate, documented and thorough?

4A. Yes.5 Q. Now, was there one particular assumption

6 with which you disagreed with the traders in terms

7 of valuation that resulted in your group coming up

8 with much lower values?


10 MR. WEINBERG: I'm sorry. Could you

11 have the question read back?

12 MR. COREN: Sure.

13 MR. WEINBERG: I just missed it. I'm

14 sorry.

15 Q. Was there one particular assumption with

16 which you disagreed with the traders in terms of

17 valuation which resulted in your group coming up18 with a much lower value?

19 A. It could be myriad assumptions.

20 Q. Do you recall that in fact your

21 disagreements related to the prepayment speed

22 assumptions that were being used in the valuation

23 model?

24 A. I recall that at times being a discussion,

25 a discussion item.


15/60



15 (Pages 54 to 57)

Page 54

1 Q. Well, what other disagreements do you

2 recal l having in terms of the assumptions that were

3 being used to value these securi ties?

4 MR. WEINBERG: We're talking about Mr.

5 Levine's position?

6 MR. COREN: Correct.7 Q. Prepayment was one of the issues?

8 A. Discount rate.

9 Q. Right. Anything else? Loss rate an issue?


11 Q. In terms of your disagreement with Mr.

12 Kimura, do you recall what the assumptions were w ith

13 which you disagreed?

14 A. Property default likelihood.

15 Q. Prepayment speeds?


17 Q. The third one you identified, Abdullah,

18 tell me what you recall about that disagreement.

19 A. Aamer Abdullah was trading those securities

20 for Mitchell Levine, his supervisor.

21 Q. So, it was the same issues?

22 A. Aamer Abdullah was trading the non-agency

23 securities portfolio on behalf of Mitchell Levine

24 that we had questioned.

25 Q. And what, if anything, did Abdullah say to

Page 55

1 you?

2 A. That he had left the firm, as I recall,

3 when we were -- right, perhaps right before we had

4 raised differences for the traders to explain or

5 substantiate.

6 Q. Are you aware of any traders that were

7 fired as a result of having been determined to have

8 wrongly been setting values for securities?

9 A. Do I know specifically and formally?

10 Q. Do you know of any traders who have been

11 terminated as a result of having been determined to

12 set inappropriate values for securities?

13 A. From my understanding, Mitchell Lev ine and

14 Michael Flannelly.

15 Q. Were both terminated for that reason?

16 A. That was my understanding.

17 Q. When were they terminated?18 A. I believe in March of '04.

19 Q. I had asked you about a Richter and I think

20 I gave you the wrong first name. Does a Greg

21 Richter ring a bell?

22 A. Yes.

23 Q. And what position did Greg Richter have?

24 A. I believe he was head of ABS principal

25 finance.

Page 56

1 Q. And did you have any disagreements with

2 Greg Richter about the valuation of subprime


4 A. Not with him, not that I recall.

5 Q. Do you recall having any disagreements with

6 anyone else at Credit Suisse having to do with the7 valuation of subprime mortgage-backed securities?


9 A. Could you repeat that question again?

10 Sorry.

11 Q. Do you recall having disagreements with

12 anyone else at Credit Suisse having to do with the

13 valuation of subprime mortgage-backed securities?

14 A. Yes.

15 Q. With whom did you have those disagreements?

16 A. I'm not sure if disagree ment is quite the

17 right word. With differences that were resolved on

18 very subjective pricing matters.

19 Q. What differences do you recal l having as

20 relates to subprime mortgage-backed securities?


22 A. On occasions there might be some residuals

23 that we felt we came up with different valuations

24 than the traders.

25 Q. Is it fair to say that whenever there was a

Page 57

1 difference or a disagreement, your group always had

2 a low er value than what the traders had set for the

3 security?

4 A. No.

5 Q. Sometimes you had a higher value?

6 A. Yes.

7 Q. Did you ever have a higher value as relates

8 to residual interests in subprime mortgage-backed

9 securities?

10 A. Yes, we could, yes.

11 Q. Do you recall any instances where you came

12 up with a higher value?

13 A. I recall some residuals, yes.

14 Q. Do you know who Andy Kimura reported to?


16 Q. Yes. Who is Kimura's boss?

17 A. At what time frame?18 Q. Any time frame you can recall . If there

19 was more than one, just tell me all of them.

20 A. I recall that he reported to Matthew Ruppel

21 and that he reported to Jim Healy.

22 Q. Now, was there a department or a group

23 known as product control while you were at Credi t

24 Suisse?

25 A. Yes.


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16 (Pages 58 to 61)

Page 58

1 Q. And what was the responsibil ity of that

2 group?

3 A. To generate and report the business P and L

4 for the various departments of the firm.

5 Q. And were you within that group?

6 A. Yes.7 Q. And was the function -- well , strike that.

8 What role or responsibil ity, if any, did

9 the product control group have in connection with

10 the securitization -- let me start over. That's a

11 mouthful.

12 Tell me what responsibi lities, if any, the

13 product control group had in connection with the

14 securitization and sale of subprime mortgage-backed

15 securities.

16 A. To the degree that there were subprime

17 mortgage securities on the f irm's balance shee t and

18 there was a resultant P and L, then those positions

19 would be reported as on the balance shee t and that P

20 and L be reported on the income state ment.

21 Q. Well , was that group for determining the

22 value to be placed on the subprime mortgage-backed

23 securities that were retained in the inventory of

24 Credit Suisse?

25 A. No.

Page 59

1 Q. What group was responsible to do that?

2 A. The traders.

3 Q. Well, was product control responsible to

4 attempt to verify the prices set by the traders?

5 A. Yes.

6 Q. So, as I understand the way it worked

7 within Credit Suisse during the period you were

8 there, the traders set the price of these various

9 securities and then product control's responsibility

10 was to independently look at the prices that had

11 been set by the traders and determine whether you

12 agreed or disagreed; is that correct?

13 A. Correct.

14 Q. All right. And if you disagreed with the

15 values determined by the traders with respect to

16 subprime mortgage-backed securities retained by

17 Credit Suisse, what were you supposed to do?18 A. To ask the traders to provide independently

19 observable market information that would

20 substantiate where they were marking their

21 positions.

22 Q. And if they did that and you were not

23 satisfied and still disagreed with the values set by

24 the traders, who was responsible within the Credit

25 Suisse organization to determine the actual value

Page 60

1 that these assets would be recorded on the books of

2 Credit Suisse?

3 A. You're asking multiple questions there , I

4 believe. Could you break it apart?

5 Q. Well, I gave you an example where you had a

6 disagreement over pricing or value concerning7 mortgage-backed securities. You said that you would

8 go to the traders . You would ask them to

9 substantiate their va lues with market data or

10 otherwise. Let's assume they did that and you still

11 disagreed. What would happen next?

12 A. If they substantiate it, then we would not

13 disagree . We would come to agree with them.

14 Q. What if they did not in your view

15 substantiate their value, then what would happen?

16 A. We would ask for additional information

17 from them and we would also show them our

18 information and ask for them to suggest where we

19 could supplement the accuracy and completeness of

20 our work.

21 Q. Well , let's assume you went through that

22 whole process and you never reached an agreement. I

23 assume the value is an important issue that has to

24 be determined. Somebody has to make the final ca ll

25 as to which value to go with, either the traders ' or

Page 61

1 your group's value. Correct?

2 MR. CURTIS : Objection to form.

3 A. It was the responsibility of the traders to

4 mark their positions. Product control was not

5 responsible and did not have a uthority to mark

6 positions. And if there were differences between

7 our valuations and the traders' valuations, we would

8 assess whether or not that difference was reasonable

9 noise, shall we say, in the light of the illiquidity

10 and the riskiness o f the product. So that there may

11 have been a difference, but it might not be deemed

12 material for e levation or requiring further scrutiny

13 of the prices.

14 Q. And what if you deemed the difference or

15 disagreement to be material, what were you supposed

16 to do?

17 A. Then we would report that in our findings18 and elevate to more senior individuals within

19 trading management and product control for their

20 resolution.

21 Q. And would you report this and elevate it by

22 way of an e-mail?

23 A. Yes.

24 Q. Was there some formal memorandum process or

25 form that you were supposed to use to identify and


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Page 62

1 elevate these disputes, or was it done just by

2 e-mailing the various people who were involved?

3 A. There was a syste m called Global Price

4 Testing, GPT, it was a database of price testing

5 findings, and that would be used to summarize and

6 report to senior management pricing variances for7 trading inventory.

8 Q. And who maintained that report or

9 information?

10 A. Don't know.

11 Q. Now, in terms of your group's efforts to

12 verify or determine the prices or values of subprime

13 mortgage-backed securities , do you recall what the

14 key assumptions were that you considered?

15 A. For what type of securities?

16 Q. Subprime mortgage-backed securities.

17 A. Credit ratings, spread, yield spreads,

18 prepayments, defaults.

19 Q. Discount rate?

20 A. That's what I meant by spread.

21 Q. Do you recall in the 2002-2003 time frame

22 what information your group considered in order to

23 derive the appropriate prepayment assumption that

24 you would use in valuing subprime mortgage-backed

25 securities?

Page 63

1 A. The historical performance of comparable --

2 THE WITNESS: Are you okay?

3 MR. WEINBERG: Go ahead. I'm sorry.

4 A. The historical performance of existing

5 comparable deals.

6 Q. Why was that important?

7 A. For reasonableness comparison.

8 Q. In order to project the future, it's

9 important to consider the past; is that correct?

10 A. Yes.

11 Q. What else did you consider as important in

12 determining the appropria te prepayment speed to use

13 in valuing a subprime mortgage-backed security?

14 A. What were the factors that were used to

15 determine the prepayments of a mortgage se curity?

16 Q. Yes, to determine what the appropriate

17 prepayment speed was to use in your valuation model.18 MR. CURTIS: Objection to form.

19 A. We took a look at -- we took a look at

20 comparable deals and considered, looking at the

21 historical performance of those comparable deals,

22 and if they weren't really comparable deals, then we

23 probably gave them less weighting. To the exte nt

24 they we re more comparable, we gave them more

25 weighting.

Page 64

1 Q. How did you determine if a deal was

2 comparable?

3 A. Maturity.

4 Q. Originator?

5 A. That was one consideration.

6 Q. For example, if you're looking at all the7 deals of one originator, they would be more likely

8 to be comparable?


10 A. That was a starting point, but not

11 definitive.

12 Q. What else did you look at?

13 A. Generally, when we were looking at -- we'd

14 look at I believe FICO scores.

15 Q. Anything else?

16 A. Loan coupon.

17 Q. That's the interest rate on the loan?


19 Q. Yes?20 A. Yes.

21 Q. Did you find that, in general, the higher

22 the interest rate on the underlying loans, the

23 higher or faster which that pool would prepay?

24 A. Generally.

25 Q. And that's because people who are paying

Page 65

1 higher rates are more motivated to try to refinance

2 and get lower rates; is that correct?

3 A. Possible.

4 Q. Can you recall anything else you cons idered

5 in determining the appropriate prepayment speed to

6 use in your valuation model?

7 A. Those are the ones that come to mind.

8 Q. Did you look at any market data or monthly

9 publications to as sist you in arriving at the

10 appropriate prepayment rate assumption?

11 A. We would see through fixed income research

12 and through data reported on Bloomberg as to where

13 various types of deals were prepaying.

14 Q. Did you look at any internal Credit Suisse

15 publications on that subject, such as HEAT reports?

16 A. Generally not.

17 Q. Were you aware that Credit Suisse put out18 such a publication on a regular basis?

19 A. Yes.

20 Q. And why wouldn't you use those

21 publications?

22 A. To maintain independence.

23 Q. Now, in terms of deriving a value for

24 Credit Suisse's subprime mortgage-backed securities,

25 was your group using a model in order to reach that


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18 (Pages 66 to 69)

Page 66

1 value?



4 Q. Yes. You indicated that it was the trader

5 who set the price of the securities, and the

6 responsibi lity of your group within product control7 was to independently try to determine those values

8 and see i f you could substantiate the values set by

9 the traders, correct?

10 A. That was our role.

11 Q. Right. In order to perform your role, did

12 you use a valuation model?

13 A. Generally, we use models from Bloomberg or

14 Intex.

15 Q. And within those models, you would import

16 the assumptions that you determined to be

17 appropriate concerning prepayment speed or discount

18 rate or loss rate; is that correct?

19 A. We would use those inputs.

20 Q. And do you know -- strike that.

21 Were you personally able to operate those

22 models?

23 A. Yes.

24 Q. And do you recall in general how many

25 inputs there were, how many variables had to be

Page 67

1 inputted?

2 A. No, not specifically.

3 Q. Can you give me a range? And I know we

4 have a loss rate, we have a prepayment rate, we have

5 a discount rate assumptions. Anything else that is

6 inputted into the model?


8 A. Those are the three basic ones.

9 Q. Let me show you what's been marked as

10 Exhibit 1. You should have a book of exhibits

11 before you.

12 MR. WEINBERG: Do you want him to look

13 at the book or look at the original?

14 MR. COREN: He can look at, yes, look

15 at the original. It's the color presentation.

16 Q. Are you familiar with materials of this

17 sort?18 A. Could you be more specific with your

19 question?

20 Q. Yes. Well, let's start with Exhibit 1.

21 Have you seen -- while you were employed by Credit

22 Suisse, did you have an opportunity to review

23 Exhibit 1?

24 A. To my recall, no.

25 Q. Did you see materials of this sort before?

Page 68


2 A. May you please be more specific?

3 Q. Yes. Did you see presentations of this

4 sort prepared within Credit Suisse to be used in

5 connection with marketing a relationship with a

6 subprime loan originator such as ABFS?7 A. No, not that I recall.

8 Q. Did you know what the asset finance team

9 was?

10 A. Yes.

11 Q. What role did that team play?

12 A. To securitize products for clients.

13 Q. And did you interact with the asset finance

14 team?

15 A. Sometimes.

16 Q. And what, in what way would you interact?

17 A. If I were looking to price verify certain

18 positions and I wanted some additional information

19 to understand the positions, I might approach them.20 Q. When the asset finance team or group

21 structured a securitization, was it the

22 responsibility of your group to price verify the

23 various securities within that securitization?

24 A. Could you be more specific?

25 Q. Yes. Let's just talk in generally --

Page 69

1 general about a securitization. If the asset

2 finance team structured, for example, a

3 securitization involving pools of ABFS subprime

4 mortgage-backed securities, was your group then

5 responsible to price verify the various tranches of

6 securities that were being sold or retained in

7 connection with that securitization?

8 A. Our exe rcise was strictly internal in order

9 to price verify the positions that we held.

10 Q. So, if Credit Suisse was going to hold any

11 of the tranches of a par ticular securitization, then

12 your group would be involved in price verifying the

13 values set by the traders; is that correct?

14 MR. WEINBERG: Objection to form. Go

15 ahead.

16 A. If they were structuring a security that

17 had not bee n created yet and was not ye t something18 that we owned, we had no such role.

19 Q. So, your role was only after there was a

20 securitization that was structured and Credit Suisse

21 owned a tranche of that securitization?


23 A. If we didn't own something, there was no

24 responsibility on our part to price verify it.

25 Q. Whose responsibi lity was it to set the


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19 (Pages 70 to 73)

Page 70

1 price of the various tranches of securities that

2 were not going to be owned by Credit Suisse that

3 were either going to be sold or retained by the

4 originator of the loans in the securitization?

5 A. I don't know.

6 Q. Didn't Credit Suisse own all of the7 tranches of a security in connection with a

8 securitization until they were sold; isn't that how

9 they were structured?



12 Q. Yes. Isn't it true that when you have a

13 securitization, Credit Suisse owns all of the

14 tranches of the security until the particular

15 tranches are sold to investors?

16 A. Not necessarily.

17 Q. Is that the case in some circumstances?

18 A. It can be.

19 Q. Well, in those circumstances, was your20 group involved in price verifying the securities?

21 A. If the securities had not been created yet,

22 we would not price verify the securities.

23 Q. Well, what if they had been created but not

24 yet sold?

25 A. If they had been created and not yet sold

Page 71

1 and were in inventory, existing securities, then

2 we -- it would fall in our population to test.

3 Q. Now, did Credit Suisse from time to time

4 maintain in its inventory res idual interests or

5 interest-only strips in subprime mortgage-backed

6 securities?

7 A. Yes.

8 Q. And in those circumstances, would it have

9 been the responsibility of your group to price

10 verify the values of those interest-only strips or

11 residual interests that are held on the books of

12 Credit Suisse?

13 A. Yes.

14 THE WITNESS: Can we take a break?

15 MR. WEINBERG: Sure.

16 THE WITNESS: I just want to just --

17 MR. WEINBERG: Do you want to take a18 couple minutes?

19 MR. COREN: Sure.

20 THE VIDEOGRAPHER: It's now 10:17.

21 We're going off the video record.

22 (Brief recess.)


24 the video record. It's now 11 -- excuse me, 10:35.

25 BY MR. COREN:

Page 72

1 Q. Mr. Hong, was there a -- strike that.

2 We talked a little bit about the dispute

3 resolution process where if your group disagreed

4 with a pricing determination by the traders, how you

5 would approach that. Was there a manual or

6 something in writing which told you what you were7 supposed to do in connection with a valuation

8 dispute between your group and a trader?

9 A. There was a price testing policy paper. I

10 don't recall the specifics of pricing difference

11 resolution.

12 Q. If I were to want to make a request for

13 that policy, what would I ask for?

14 A. Price testing policy.

15 Q. And is that something that applied to both

16 your group and the traders?

17 A. There was a policy that for our group with

18 respect to how we monitor the traders.

19 Q. Now, are you familiar with a group known as

20 risk management?

21 A. Yes.

22 Q. What did that group do at Credit Suisse?

23 A. It was responsible for calculating and

24 reporting the market risk of the firm's positions.

25 Q. And did your group interact with the risk

Page 73

1 management group as related to pricing or valuation

2 issues?

3 A. Yes.

4 Q. Tell me why the two groups would interact

5 on that subject.

6 A. In order for the market risk group to be

7 able to estimate the market risk of the firm's

8 positions, it had to have an underlying confidence

9 that the positions were correctly marked in the

10 first place.

11 Q. And when you say marked, you mean priced or

12 valued, correct?

13 A. Yes.

14 Q. So, you would report -- I take it your

15 group would try to independently verify the values

16 or pri ces set by the traders and then you would, if

17 you had a disagreement, pass that information on to18 the risk management group; is that correct?

19 A. They were informed of differences that we

20 were trying to resolve with the traders if,

21 particularly if they were very, very substantial and

22 unresolved.

23 Q. All right. And did you interact with Bruce

24 Jin of risk management?

25 A. Yes.


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20 (Pages 74 to 77)

Page 74

1 Q. And tell me about your interaction with Mr.

2 Jin.

3 MR. WEINBERG: Can you more specific?

4 MR. COREN: Sure.

5 Q. How frequently would you interact with Mr.

6 Jin?7 A. Several times a week.

8 Q. And did you consider that your group in

9 product control and his group in risk management had

10 essentially the same mission, and that was to

11 protect the financial posi tion of Credit Suisse and

12 make sure that assets that were being retained by

13 the company were properly valued?


15 Q. Is that a fair statement?

16 A. The role of valuations were the purview of

17 my group, not that of market risk.

18 Q. But if you unearthed what you believed to

19 be a substantial disagreement as to value and that

20 the traders had set a value that you thought was

21 considerably higher than the value of a particular

22 security, it would be important for ri sk management

23 to know that; would it no

Documents

Testimony: Willie Pest (CPA at PWC). Sarbanes Oxley violations