Veteran Wall Street regulators ZZ Top sang "I Gotsta Get Paid." That's a common gripe among many folks in the industry believe that they're underpaid or didn't get a fair shake when it came to handing out last year's bonus checks. For some, the option is to tell your boss to drop dead and go work elsewhere for more bucks. For others, the option is to find a way to skim some of the cream off the top without anyone noticing. One way or another, you gotsta get paid! Which choice you make is the difference between crossing over the line from compliant to non-compliant behavior. Read about a recent FINRA regulatory settlement involving a senior trader who opted to step over the line rather than walk out the door.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Matthew Joseph Caballero submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Matthew Joseph Caballero, Respondent (AWC 2013037403001, September 16, 2016).
In 2008, Caballero entered the securities industry as a sales and trading analyst with Citigroup, where he remained until June 20, 2013. The AWC asserts that Caballero had no prior disciplinary history.
Citigroup Swap Desk Bonus Pool
The AWC asserts that between the relevant period of March 1, 2013, and March 25, 2013, Caballero, was a senior trader on Citigroup Global Markets Inc.'s US Dollar Interest Rate Swap Desk and that his compensation was derived from a salary and bonus. The Swap Desk's bonus pool was annually distributed at the discretion of the Desk Supervisor, who considered each trader's contribution to profit and loss.
Main Book / Side Books
In order to enter Swap Desk transactions, traders accessed the firm's electronic order system through the Derivative Trading Desk Book (the "Main Book"), where that electronic blotter maintained each transaction's record. In addition to the Main Book, each trader had a so-called Side Book, on which they copied their proprietary trades executed by them or their junior traders from the Main Book. The AWC asserts that:
[D]uring bonus season these Side Books allowed the Desk's manager to more accurately assess the contribution of each senior trader to the Desk in order to split the bonus pool.
I Gotsta Get Paid
In addition to their proprietary trading, senior traders handled the Swap Desk's customer orders, which would not be entered into the Side Books and, accordingly, not figure into the bonus pool splits determined by the Desk Manager. Apparently, Caballero took a more expansive view of the time and effort that he was investing in handling the customer orders and apparently believed that it was unfair for the Desk Manger to exclude such orders from the bonus pool calculation. Accordingly, Caballero allegedly copied certain customer orders in the Main Book onto his Side Book. The AWC asserts that Caballero's:
purpose was to make his Side Book appear more profitable in hopes of receiving a larger share of the annual bonus pool. However, by altering the execution price in the Side Book to reflect a higher profit, Caballero caused a corresponding alteration in the execution price for that transaction in the Main Book, which resulted in a corresponding decrease in the Main Book's profit.
For example: On March 1, 2013 Caballero executed a trade through the Main Book whereby he sold 50,000 Treasury bonds at $101.29688. When Caballero copied the transaction to his Side Book, he adjusted the price to show that he had sold the bonds at $101.34375, a difference of $0.04687 per bond. The record of the trade on the Main Book was automatically adjusted to show that the sale had occurred at $101.25001, reducing the profit reflected on the Main Book by the same amount and netting out the two records to equal zero. This particular trade increased Caballero's Side Book profits by $23,000.
The altered prices entered by Caballero did not impact the execution price of any trade; however, the alterations did allegedly render the firm's books and records erroneous for the relevant period covering 17 trading days and 73 subject trades. The AWC asserts that Caballeros price adjustments:
added between $3,905 and $46,875 per trade to his Side Book's profits, and reduced the Main Book's P&L by the same amount, for a total of approximately $ 1.3 million.
The AWC asserts that on June 20, 2013, Citigroup filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") reporting Caballero's May 22, 2013, termination for "[l]oss of confidence in judgment following inaccurate recording of internal trades - not involving customer transactions."
FINRA deemed Caballero's conduct to constitute violations of FINRA Rules 4511 and 2010.In accordance with the terms of the AWC, FINRA imposed upon Caballero a three-month-suspension from association with any member firm in any capacity. The AWC explains that in consideration of Caballero's financial status demonstrating an inability to pay, no monetary sanction was imposed.
Bill Singer's Comment
According to the AWC, Citigroup fired Caballero on May 22, 2013 and the member firm filed the Form U5 disclosing the discharge on June 20, 2013. Using that latter filing date as a point of departure and using the AWC's date of September 16, 2016, as a point of arrival, we have a time span of about 3 1/4 years. Somebody . .. . anybody . . . explain to me just what required 3 1/4 years for FINRA to investigate Caballero's misconduct and decide to either charge him and go to a hearing or, in the alternative, settle the matter? Frankly, this should have been a fairly open-and-shut fact pattern for FINRA to investigate because the documentation clearly showed the erroneous entries and Citigroup likely had the requisite back-up and proof to show what should have been entered and what should not have been altered.
In the Caballero AWC, we don't have a he-said-she-said problem inherent in many customer complaints -- and, pointedly, we don't even have a complaining customer. We don't even appear to have a potential respondent arguing that there was another compliant version of his conduct. When all is said and done, Caballero engaged in inappropriate self-help. and seems to have been properly fired in 2013 for his actions. His employer had him dead to right.
All of which raises a troubling concern: If nonsense like this requires over three years of FINRA's time and resources, what goes on at the self regulator when it comes to investigating the more serious transgressions of Wall Street?