The Financial Industry Regulatory Authority (FINRA) fined Guggenheim Securities, LLC of New York $800,000 for failing to supervise two collateralized debt obligation (CDO) traders who engaged in activities to hide a trading loss.
Alexander Rekeda, the former head of Guggenheim’s CDO Desk, was suspended for one year and fined $50,000.
Timothy Day, a trader on Guggenheim’s CDO Desk, was suspended for four months and fined $20,000.
Ivan Harris of Morgan Lewis in Miami represented Guggenheim.
Julian Friedman of Stillman & Friedman in New York represented Rekeda.
And Mark Knoll of Bessler Amery in New York represented Day.
“Guggenheim’s inadequate supervision allowed their traders to engage in extensive and repeated inappropriate actions to try to conceal a trading loss,” said Brad Bennett, FINRA’s enforcement chief. “The traders deceived their customer and supported their scheme through the use of inaccurate books and records, all of which went undetected by the firm.”
In October 2008, as the result of a failed trade, Guggenheim’s CDO Desk acquired a €5,000,000 junk-rated tranche of a collateralized loan obligation (CLO).
After unsuccessful attempts by Guggenheim’s CDO Desk to sell the position, Rekeda and Day persuaded a hedge fund customer to purchase the CLO for $950,000 more than it had previously agreed to pay by falsely presenting the CLO as part of a package of securities a third party offered for sale.
FINRA found that in an attempt to hide the trading loss on the CLO position, the traders provided the customer with order tickets that increased the price for the CLO position and decreased the price of the other positions that were part of the transaction.
When the customer inquired about the pricing adjustments, Day, at Rekeda’s direction, lied and said a third-party seller of the CLO position had already settled the trade at a higher price and requested the customer pay this higher price.
The customer agreed to overpay for the CLO and in return, Day and Rekeda agreed to compensate the customer through other transactions, including pricing adjustments on six other CLO trades, a waiver of fees the customer owed in connection with resecuritization transactions, and a cash payment to the customer.
The records created to document the transactions did not indicate any connection to the overpayment for the CLO.
FINRA found Guggenheim failed to conduct adequate review of the CDO Desk’s trades, documentation concerning transactions by traders on the desk, and the traders’ email communications.
Guggenheim, Rekeda, and Day neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
As part of the settlement, Guggenheim must retain an independent consultant to review and make recommendations concerning the adequacy of its supervisory procedures.