Traders Prosecuted for Defrauding Firm in Stock Parking Scheme
The SEC has initiated charges against two traders that it alleges engaged in a scheme whereby one of the traders parked securities at the other’s firm. The SEC charges that the selling trader wanted to avoid firm assessments imposed for holding inventory securities beyond aging limits. The buying trader benefitted by profiting from the round-trip transaction. The buying trader has settled with the SEC, agreeing to disgorgement and a bar from the industry. The SEC alleges that the traders attempted to hide their activities by using texts and cell phone conversations. Although the amounts involved firm inventory positions and not client accounts, the SEC asserts that the selling trader, as an employee, owed his firm “fiduciary duties of care, candor, and loyalty with respect to matters within the scope of his employment, which included the management of a trading portfolio.” The SEC charges violations of the anti-fraud rules.
OUR TAKE: This case shows that an employee can incur regulatory liability for violating firm policies even in the absence of client harm. The SEC has gradually expanded the concept of securities fraud to include committing fraud on your own firm.