Riskless Principal Bond Trader Barred

February 27, 2014

Riskless Principal. Now that's a pretty simple concept for a trading desk. You can't incur risk. And you're trading in a principal capacity. Of course, it's always those simple concepts that seem to result in the most blatant violations with the worst consequences.

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, Gregg N. Nussbaum submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Gregg N. Nussbaum, Respondent (AWC 2013038444702, February 19, 2013).

From 1990 through August 22, 2013, Nussbaum was associated with various FINRA member firms. The AWC asserts that in 2004, Nussbaum was subject to an NASD AWC whereby he was fined $5,000 for effecting government securities transactions for a member firm at a time when he was not properly registered. 

Not So Riskless

The AWC asserts that First Integrity had authorized Nussbaum to engage in riskless principal trading limited to the simultaneously open and close of a U.S. Treasury ("UST") position not to exceed $5 Million. Notwithstanding those trading limits, the AWC alleges that on September 15, 2011, Nussbaum executed seven transactions between 11:49 a.m. and 12:26 p.m. in which he knowingly opened a $35 Million UST position, which, thereafter, he closed in seven transactions between 12:42 p.m. and 1:07 p.m.  On September 16, 2011, Nussbaum allegedly knowingly maintained a $20 Million and a $35 Million UST position, neither of which position was opened and closed simultaneously. FINRA deemed the cited transactions to constitute unauthorized trading in violation of FINRA Rule 2010.

A Matter Of Timing

In an apparent attempt to conceal his efforts to exceed his trading authority, Nussbaum purportedly submitted 52 order tickets with inaccurate execution times, which gave the impression that he had complied with the $5 Million simultaneously opened and closed limitations. FINRA deemed such conduct to constitute violations of FINRA Rule 2010 and NASD Conduct Rule 3110(a).

A Close Shave

The haircuts on the September 16th cited positions resulted in First Integrity falling below the $100,000 Net Capital requirement for firms engaging in proprietary trading, and, accordingly, the firm conducted a securities business while under its requirement. FINRA deemed that Nussbaum's conduct causing the non-compliance with his firm's Net Captal obligations constituted a violation of FINRA Rule 2010.

In accordance with the terms of the AWC, FINRA imposed upon Nussbaum a Bar from associating with any FINRA member in all capacities. 

Bill Singer's Comment

A short-and-sweet AWC from FINRA -- compliments on a nice job!  

The issue to focus on here is that Respondent Nussbaum was only authorized to engage in riskless principal trading. By its terms, that role did not authorize him to incur unauthorized risk; and, moreover, even he was limited to putting on simultaneously opened and closed $5 Million principal trade. According to the AWC, Nussbaum violated both the riskless nature of his trading limits as well as the capital limit.  Obviously, such shenanigans on a trading desk can cripple a firm.

Don't miss today's earlier BrokeAndBroker Blog: "Merrill Lynch Employee Sought $23 Million Crown Jewel Account Damages"