COLLUSION WITH PRICING VENDOR LEADS TO SEC LAWSUIT
The SEC filed suit against 4 individuals for conspiring to overvalue a commodity derivatives portfolio. The SEC alleges that an options trader schemed with the principals of a third party pricing service to continue business with the firm so long as the firm continued to rubber-stamp his prices. According to the SEC, the trading firm accounted for over 60% of the pricing service’s business. The complaint alleges that the pricing firm simply forwarded the trader’s marks directly to his firm’s risk management department. The SEC claims that the derivatives portfolio was overvalued by nearly $700 Million, resulting in materially misleading financial statements and disclosure for both the trading firm and the pricing firm.
OUR TAKE: Firms should ensure that traders and portfolio managers obtain more than one independent price. Firms should also determine how “independent” the independent pricing vendor truly is.