by T. GormanPosted on Posted in SECActions

The New York Attorney General’s insider trading 2.0 investigation is apparently expanding. Initially the investigation concerned the limits of insider trading, pushing the issue into questions more akin to fairness and a parity of information The investigation focused, for example, on questions concerning advance access to certain information sources which might involve market moving information. While those issues did not fit within the contours of traditional insider trading which centers in on the misuse of corporate information by insiders in its traditional form, the inquiry addressed important market issues.

Now the investigation has expanded into broader market and trading questions. The New York AG has brought an action against Barclays claiming that it defrauded customers of its dark pool. Specifically, the action centers on allegations that the financial institution falsified its marketing materials for the pool and misled users.

First, the bank misrepresented how it used the pool. Barclays stated that it did not favor its pool when seeking execution for orders. In fact the statement is not true.

Second, the bank misrepresented the safety of trading in the pool. Barclays claimed that it monitored the dark pool to eliminate high speed, predatory trading. Participants were told that the firm operated a surveillance system called Liquidity Profiling which tracked each trader to identify predatory traders, rate them based on certain characteristics and hold them accountable. In fact Barclays never precluded a participant from trading in the pool. The firm also did not regularly update ratings on high-frequency traders monitored by Liquidity Profiling. Indeed, in some instance Barclays overrode ratings from the system regarding high speed traders and assigned them safe ratings. Overall, in marketing the pool the financial institution misrepresented the number of high speed traders using it and the safety of the pool. This action is pending in New York State court.

The expansion of Insider Trading 2.0 into the operation of dark pools follows two prior SEC enforcement actions. In one the agency claimed essentially that the dark pool was not dark enough. Specifically, the complaint alleges that while participants were assured complete confidentiality in fact the pool used information and data about participants in marketing materials. In the Matter of Liquidnet, Inc., Adm. Proc. File No. 3-15912 (June 6, 2014).

Last fall, in its first action against a dark pool, the agency claimed that a dark pool misrepresented the manner in which it obtained executions for customers. In the Matter of Pipeline Trading Systems LLC, Adm. Proc. File No. 3-1460 (Oct. 24, 2011).

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by T. GormanPosted on Posted in SECActions

Enforcement officials frequently emphasize the benefits of cooperation. The cases involving former Credit Suisse Managing Director David Higgs illustrate the point. U. S. v. Higgs, 1:12-cr-00088 (S.D.N.Y. Plea February 1, 2012); SEC v. Kareem Serageldin, Civil Action 12 CIV 0796 (S.D.N.Y. Settled January 21, 2014).

The information in the criminal case alleged a scheme involving four former bank traders: Kareem Seregeldin, Global Head of Structured Credit Trading at Credit Suisse; David Higgs, Managing Director and Head of Hedge Trading who reported to Mr. Serageldin; Faisal Siddiqui, vice president in the CDO Trading Group in New York who reported to Mr. Higgs; and Salmaan Siddiqui, vice president in CDO Trading Group in New York who also reported to Mr. Higgs.

In late 2007 and 2008 the section in which the defendants worked specialized in structuring and trading mortgage backed securities. Mr. Higgs, working in the London office, oversaw and managed a trading book known as ABN1. That book was composed primarily of several thousand individual long and short subprime related positions. Until March 2008 the book had a net asset value of about $5.35 billion. About $3.71 billion in the book consisted of ABS cash bonds, including RMBS and CMBS positions.

The bonds held on the books of Credit Suisse had to be priced daily and marked-to-the-market to record their fair value. During the period the ABX Index served as a benchmark for certain securities backed by home loans. Credit Suisse traders were to consult the corresponding ABX indices when pricing RMBS bonds and related products.

As the market crisis unfolded in 2007 the real estate market deteriorated. This led to significant reductions in valuations of mortgage-backed securities. As the crisis continued, the prices dropped and the securities became illiquid. If the required write downs were taken, the bank would lose millions of dollars.

Beginning in late August 2007 defendants changed the way they valued the securities. Rather than tie the daily pricing to the ABX Index, they were marked to avoid the huge write downs. Mr. Serageldin directed Mr. Higgs on numerous occasions to reach specific profit and loss targets on a daily and at month end. Mr. Higgs then instructed Mr. Siddiqqui and another to mark the books to achieve the targets. This resulted in an increasing disparity between the value of the securities and the benchmarks that were supposed to be used. Indeed, the disparity became so pronounced that at one point Mr. Serageldin suggested they mark the prices down to avoid discovery. It also artificially inflated the prices in the ABN Book.

Eventually the abnormally high prices were discovered and the bank unraveled the fraud. On March 20, 2008 Credit Suisse announced that it had completed the evaluation of the prices for the securities. The bank wrote down the value by about $2.65 billion. About $540 million was in the ABN1 trading book.

In the criminal case Mr. Higgs pleaded guilty under a cooperation agreement with the U.S. Attorney’s Office to conspiracy to falsify the books and records of the bank. He was sentenced to time served with no supervised releases. He was also directed to pay forfeiture in the amount of $900,000, a $50,000 fine and a $100 special assessment.

Mr. Higgs settled with the Commission, consenting to the entry of a permanent injunction based on Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). No disgorgement or penalties were ordered. The settlement cited Mr. Higgs’ cooperation.

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