* Probe finds COO Bouee alone initiated observation of Khan
* Board backs CEO with full confidence
* Company veteran James Walker named to replace Bouee (Adds further reaction, context)
By Brenna Hughes Neghaiwi and Michael Shields
ZURICH, Oct 1 (Reuters) - Credit Suisse cleared its CEO on Tuesday of snooping on a star wealth manager in an episode that saw suicide, scandal and espionage invade the secretive world of Swiss private banking.
The spying on ex-wealth management chief Iqbal Khan after he left the bank for arch-rival UBS, and the suicide of a private investigator involved in organising the surveillance, has badly tarnished the reputation of the Swiss bank and its top managers.
"I've not come across anyone who is not shocked by what is happening," a person familiar with Credit Suisse's management said. "The shock is big. What you've seen in the media over the last 10 days has had a massive impact on the staff here."
Khan, who left Switzerland's second-biggest bank in July and began work on Tuesday at UBS, was under surveillance by private detectives hired by Credit Suisse from Sept. 4 to Sept. 17, when he spotted them.
News of a rift between Credit Suisse CEO Tidjane Thiam and Khan prior to the latter's departure has prompted speculation over reasons for the surveillance, which has roiled Switzerland's financial centre, triggered a criminal investigation and hurt the image of everyone involved.
A private investigator who organised the surveillance of a senior former Credit Suisse manager committed suicide last week, a lawyer for the security firm at the centre of the spying case said.
The bank's chairman, Urs Rohner, said on Tuesday that a personal dispute between Khan and Thiam, which had made it impossible for the two to work together, had prompted Khan's departure but had been unrelated to the hiring of detectives.
The bank's internal probe carried out by law firm Homburger found Chief Operating Officer Pierre-Olivier Bouee alone initiated observation of the former wealth management executive to see if he was trying to poach former colleagues to join him at UBS.
The investigation found no evidence that Khan had attempted to poach employees or clients from Credit Suisse.
Bouee - whose professional life has closely tracked Thiam's, having worked together at McKinsey, Aviva and Prudential before moving in 2015 to Credit Suisse - stepped down from his role to take responsibility for the matter, the bank said on Tuesday.
Bouee and Thiam had been close associates since the McKinsey days, with Bouee described as more abrasive than Thiam by one source who previously worked with them both in Britain.
"He was bad cop to Tidjane's good cop," the person said, adding that the two usually spoke together in French.
A second banker who worked with both added that, while Thiam and Bouee had a good working relationship, Thiam did not maintain an inner circle of closer contacts amongst his team.
Rohner told a news conference on Tuesday that Thiam still enjoyed the full confidence of the board. "We have absolutely zero evidence that he was informed about it," he said, while apologising to Khan and his family for the incident.
The board called the spying operation "wrong and disproportionate" in a statement, adding it had caused severe reputational damage for the bank.
The criminal investigation of the spying operation continues.
Rohner and John Tiner, head of the board's audit committee, batted back questions about the credibility of the probe's findings, saying the incident was unusual and insisting Thiam was on top of what was happening at the group.
Only two employees - Bouee and the security boss under him, who also resigned - knew of the surveillance, the probe found.
However, deleted messages sent on secure platform Threema used by Bouee and security personnel had limited the scope of the findings, Homburger managing partner Flavio Romerio said.
Messages between Bouee and Thiam from Aug. 22 onward, which were sent via company email and messaging platform WhatsApp, had been reviewed and found not to be relevant, he added.
Thiam did not attend the news conference.
Two big investors said last week that they wanted Thiam, architect of a sweeping three-year revamp at the bank, to stay unless it was shown he broke the law, but shareholders largely remained silent on Tuesday as Credit Suisse's shares reversed early gains to close down 2.9%.
Khan was known as a smooth and ambitious manager putting life into Thiam's strategy of reshaping the bank into a wealth management juggernaut to rival bigger peer UBS.
Under his watch, the International Wealth Management business he led more than doubled profits and sharply boosted the client assets it handles.
The abrupt departure of Pakistan-born Khan, who moved to Switzerland when he was 12, exposed his falling out with Thiam, the 57-year-old Franco-Ivorian executive who revamped a stagnant Credit Suisse by cutting thousands of jobs, scaling back investment banking and bolstering its balance sheet.
Rohner said a heated exchange that took place between the two in January prompted the chairman to get involved.
"The decisive question for me was whether the differences between the two gentlemen... would impact their cooperation going forward," Rohner said, adding their performance was unaffected at first. "But it became apparent that a long-term, trusting and mutual cooperation was no longer possible and that Mr. Khan wanted to leave the bank."
Khan's switch to co-head of wealth management at market leader UBS sealed the divorce.
Khan, 43, went to the police after the Sept. 17 confrontation with at least one detective who was shadowing him and his wife as they drove through Zurich. Conflicting versions have emerged of how the incident unfolded.
A spokesman declined comment on behalf of Khan, stating that "Mr. Khan being now with UBS will not comment on today's announcement of Credit Suisse". UBS also declined to comment. (Reporting by Brenna Hughes Negaiwhi, Michael Shields and Oliver Hirt; Additional reporting by Carolyn Cohn, Joshua Franklin and Silke Koltrowitz; Editing by John O'Donnell/Edwina Gibbs/Susan Fenton)