Head of Fixed Income Blew Up His Firm by Shorting Treasuries
The SEC has commenced enforcement proceedings against a former head of fixed income trading for engaging in a series of unapproved short trades in Treasuries that ultimately resulted in his firm’s bankruptcy.
According to the SEC’s complaint, the firm had restricted the defendant from trading outside very specific risk parameters intended to protect the firm’s capital. In the summer of 2019, the trader, who also served as the firm’s head of fixed income, became convinced that interest rates would rise and Treasuries would fall. Instead, interest rates trended down. Rather than covering his positions, the trader doubled down on short trades, expecting the market to reverse, and hid his positions with fake long trades placed through firm omnibus accounts at two third-party broker-dealers. When trading counterparties demanded payment, the firm could not honor over $24 Million in trading losses and ultimately filed bankruptcy and unwound after more than 20 years in business. The trader also faces criminal charges.
The rogue trader’s prosecution is cold comfort to his former firm’s employees and owners. Firms cannot just set risk limits and hope that traders and portfolio managers will comply. They must implement monitoring and supervision to ensure that employees cannot spend firm capital without sign-off from an independent person.
Read SEC complaint here.