The Securities Lawyer Blog has posted previously on brokers who have paid the ultimate price for creating and allowing market manipulations and other bad dealings. We have also noted when broker-dealers fail to supervise or detect bad dealings.
In a recent case, Deutsche Bank's compliance department apparently did its job and now one of its former brokers is permanently barred. A hearing panel at the Financial Industry Regulatory Authority (FINRA) issued this ruling on a complaint filed by FINRA in December 2008. The decision will be final, unless appealed.
Big Manipulations
Essentially, the broker involved was alleged to have manipulated the price of a biosciences stock seeking to create big gains for a hedge fund client, his family and himself. The panel's litany of findings are a roadmap for noncompliance and self-dealing.
Mr. Edward Brokaw was located in a Connecticut office of Deutsche Bank Securities. He is said to have executed a deliberate effort to drive the biosciences stock value down and in so doing, enhance the value of contingent value rights (CVRs) for this stock.
The hedge fund client held about 18.5 million CVR's for the bioscience stock, which amounted to about 30 percent of the total outstanding CVR's. The broker and his family owned over 200,000 of these. As the stock value dropped the CVR values increased and a big payout would result for CVR holders.
Bad Calls
The evidence against the barred-broker included recorded sell orders that were placed at the firm's trading desk. And the decision by the hearing panel included evidence that orders were taken by the trading desk to sell off large share holdings of the bioscience stock by the hedge fund resulting in a drop of value.
Further, another call "explained the pricing of the CVRs and the strategy behind the hedge fund's instructions to sell close to the market's open and close" and included a statement that this game was to be played for the next 15 days. Ultimately, it was found that this was a deliberate effort to depress the stock's price.
Compliance Works
After three days, Deutsche Bank's compliance personnel picked-up on the aggressive trading pattern and stopped sales of the biosciences stock for the hedge fund. Mr. Brokaw was suspended and terminated for these trades.
Another policy at Deutsche Bank was found to have been violated in that order tickets were not created as received, but rather were aggregated for each day "with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw - thus circumventing automatic branch office compliance review of the orders"
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