MBS Trader Charged with Lying to Buy-Side about Prices
The SEC initiated an enforcement action against an MBS trader alleged to have committed securities fraud for lying about prices and the counterparty. The SEC charges that the trader used riskless principal trades to conduct transactions between customers. This allowed him to become the sole source to communicate pricing of illiquid MBS. The SEC charges that he often lied about the sales price or failed to disclose that the security came from the firm’s inventory. Several of the counterparties managed funds for the benefit of a federal government program designed to support the MBS market during the credit crisis. In addition to seeking an injunction and civil penalties, the SEC seeks to disgorge the trader’s “ill-gotten gains” which would include his bonus and anything resulting from his efforts to “improve his own standing” at the firm. The U.S. Attorney’s Office has also filed criminal charges.
OUR TAKE: Compliance professionals should consider when/how personnel communicate illiquid security prices outside the firm. As this case shows, customers can’t serve as an inherent control where they can’t verify prices. One interesting aspect of this case is the SEC seeking to disgorge amounts paid to the trader through firm bonuses.