SEC Charges Hedge Fund Traders for Using Net Trading Scheme to Hide Bribes from Brokers
The SEC filed an enforcement action against two hedge fund traders, a broker-dealer, and several registered representatives in connection with a bribery scheme whereby the hedge fund traders received personal benefits for directing fund trades. The SEC alleges that the hedge fund employees – the head trader and the back-office clerk responsible for the order management system – directly solicited various forms of personal payments as an implied quid pro quo to direct trading. They allegedly concealed their trading from their fund and its principal (neither of which are named as defendants) by engaging in “net trading” where the commission is buried in the cost of the security and not reported as a commission. Consequently, brokerage reports reviewed by the hedge fund’s principal did not reflect the directed trades.
OUR TAKE: Obtaining a commission report from your head trader is akin to a valuation report from your portfolio manager. Each has an inherent conflict of interest that may require some independent review.