A thing we sometimes like to do around here is use stories ripped from the headlines to illustrate to you, in case hypothetically this should ever be of any practical interest, how – and how not – to safely and effectively engage in financial fraud. This Rochdale guy was just arrested by the FBI, so I guess he’s a “how not” story, though I’m a little torn because I like part of his style. From the complaint:
[A] representative of Customer #1, who will be referred to as “Customer Rep. #1,” sent an instant message to [now-former Rochdale trader David] MILLER to buy Apple stock every half hour. Specifically, the message read “b 125 ok (per 1/2 hr).” MILLER confirmed that he would do so.
Records reflect that shortly after receiving this order, MILLER began trading in Apple. Over the course of the day, MILLER entered multiple, separate orders in Rochdale’s order management system in the amount of 125,000 shares. Each such order was executed over a period of time through various trading platforms to which Rochdale had access, including, but not limited to, a system that gave Rochdale direct electronic access to the New York Stock Exchange. Once MILLER fully executed one order for 125,000 shares, he would close out the order and promptly enter a new order into Rochdale’s order management system.
He ended up with a total of 1,625,000 shares, or 1,623,375 more than the customer ordered. Then of course the stock went down and so, more or less, did Rochdale. Reuters notes that “At the time, Miller told his superiors the purchases had been a fat finger error,” though you’ll note that the actual pattern of trading requires fifteen separate fat finger errors. Less “fat finger” and more “fat brain,” or “fat misreading of a client IM.” Still it has the whiff of almost plausibility about it; who among us has not misplaced three zeroes at some point in our financial lives?1
But then there’s this:
Also on October 25, 2012, MILLER engaged in a separate part of the scheme whereby he made materially false statements to another broker-dealer (“Broker #1”) causing it to sell 500,000 shares of Apple stock. MILLER purported Lo be a representative of yet another entity (“Firm A”) for whose account he falsely claimed to be trading. Contrary to his representations to Broker #1, MILLER did not work for Firm A, had no relationship with the firm, and was not authorized to trade on its behalf. MILLER nevertheless was able to convince Broker #1 to engage in trades purportedly on behalf of Firm A. …
While he was orchestrating the scheme at Rochdale on October 25, 2012, MILLER also was executing a separate part of the scheme to short Apple stock by having Broker #1 sell 500,000 shares of Apple. The investigation reveals that MILLER did this as a partial hedge against the risk presented by the buy order executed at Rochdale.
What? Hedge? What? I mean, I guess this means something like:
- Buy a ton of AAPL through Rochdale (“for Customer #1”) and sell a ton through Broker #1 (“for Firm A”).
- If it goes up, you’re a hero at Rochdale and get a huge bonus.
- If it goes down, you quit Rochdale and go to Firm A saying “hey, umm, hope you don’t mind, but I thought I’d come work for you and I’ve brought you in a couple million dollars of profit as a reverse signing bonus; I imagined you won’t mind giving me a cut of it?”2
So this is not the worst plan in the world as far as it goes – you make millions of dollars for someone, and that someone is in the sort of business where they give you a cut of the millions of dollars that you make them – but hopefully you’ve spotted the flaw, which is that whoever you lost millions of dollars for (1) knows who you are and (2) is totally mad, turns you in to the FBI, etc.
Except! I dunno, I’m still a little fond of this guy. He had a little bit of insurance either way. If he lost money for Rochdale – as he did – he had a fat-finger defense, though it’s vitiated a little bit by details like “MILLER requested assistance with bypassing the process that compounded his orders in Rochdale’s trading system … [to] prevent others from easily seeing the total number of shares MILLER had entered into the system over the course of the day.” It’s not totally clear to me that he’d have been arrested just for his Rochdale roguery; from the complaint it seems like the Broker #1 shenanigans are what convinced the FBI that this was not mainly about fat fingers.
On the other hand, if he’d lost money for Broker #1 … you can see why he might think they’d have some incentive to sweep it under the rug because it was totally crazy of them to let you trade three hundred million dollars worth of stock without actually opening an account. It’s quite big of Broker #1 to come forward despite that awkwardness, and quite charitable of the U.S. Attorney’s office not to name them in the complaint. But expect the SEC to have some awkward questions for them about their account opening process.
USA v. Miller [D. Conn.]
Ex-Trader at Rochdale Is Arrested After $1 Billion Trade in Apple [DealBook]
FBI arrests ex-Rochdale trader who imperiled firm [Reuters]
1. You think I’m kidding but I once let a client sign an agreement to pay $165 billion for transition services, which was roughly $164,835 million more than they were budgeting. They, and more importantly the other side, were nice about it. AND NOW I BLOG.
2. Or I guess just ask Broker #1 to send the check made out to you? I mean … could that possibly work? Whatever this is all nuts.