Trader Banned From Industry for Gaming Risk Management System
The SEC banned the head of a large equity swaps desk from the industry for intentionally concealing his risk position. The SEC alleges that the respondent and one of his direct reports entered and immediately cancelled fake swaps trades into their employer’s risk management system in order to trick the system into reporting lower net risk exposure. The traders lost over $24 Million when their equity arbitrage strategy did not succeed. When their violative positions became exposed, the traders were terminated. The SEC charges violations of Section 10(b) and Rule 10b-5. The respondent was also fined $150,000.
OUR TAKE: Clever wrongdoers will always try to find a way to trick compliance and risk management systems. However, firms can protect themselves from regulatory action by implementing reasonable systems and controls. In this case, the broker-dealer employer was not charged. Potential wrongdoers should take heed that the SEC will pursue bad actors even after their firms take disciplinary action.