Trader Who Brought Down Dick Bové's Former Firm Suffers The Consequences

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There are a lot of good options and I'm not prepared to make a definitive choice at this time, but I can at least say that one of my favorite recent financial crooks is David Miller, the doofus who put a fat suit on his finger, bought 1.6 million instead of 1.6 thousand Apple shares, and brought down Rochdale Securities. His story is nearing its sad conclusion:

David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC's charges. He also pleaded guilty today in a parallel criminal case.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

The phrase "planned to share in the customer's profit" is a little vague, and when we first talked about Miller I assumed that he was hoping to claim a fat finger either way and just keep the profits for Rochdale. Nope - Miller's customer was in on the plan. From the criminal complaint:

It was further part of the conspiracy that MILLER’s co-conspirator would submit a written order to MILLER on the day Apple was scheduled to announce its earnings, writing the order in such a way that MILLER later could claim that he had innocently misinterpreted it. MILLER would then execute a trade for 1,000 times the number of shares in the written instruction he had received from his co-conspirator. The plan included the fact that MILLER would falsely represent to Rochdale that the trade was on behalf of the account of Customer #1, even though MILLER and the co-conspirator knew that Customer #1 would bear no risk of loss on the trade (other than for the small portion actually set out in the written order). If the trade proved profitable, MILLER and his co-conspirator would share in the substantial profits. If not, the illegal agreement provided that MILLER’s co-conspirator would deny knowledge of the large order and MILLER would contend that he had made a mistake when he read the order.

It was further part of the conspiracy that, if the trade proved unprofitable because of the earnings announcement, Rochdale would be left holding the excess securities.

That's pretty good, no? The classic complaint about the financial industry involves the heads-I-win-tails-you-lose incentive convexity: your upside from trading for your employer is in some sense unlimited, while your downside is capped at getting fired. So you might as well take lots of risks. Miller just put that into very literal practice.

It's good but not great. For one thing: how can you be sure that this customer would actually write Miller a check out of his employer's profits on the trade if it'd been successful? But the biggest problem with Miller's plan is that he only really gets one shot: if you fat finger your firm into implosion, you probably don't get the opportunity to do it again, though, I mean, I guess you could argue the point.

So really you should want to make sure that your one shot definitely pays off, and the right way to do that is to make your bet symmetrical: have two customers submit two plausibly-misinterpretable orders to two brokers, one long and one short, then take the profits on the winning bet and DK the losing one. Actually the most parsimonious approach requires only three parties - one customer taking offsetting positions with two brokers, or even more magically two customers and one broker. Miller should've gotten another friend at another prop trading shop to submit a 1.6 thousand-or-million share short order to him. Then whatever happens he got one order right and fat-fingered the other, and he just has to remember which was which.

But I guess he thought that was too cute, or could only find one crook to work with him. Instead he did some idiotic thing where he put in the short order at another brokerage, pretending to be acting on behalf of yet another trading firm:

In addition, MILLER engaged in a separate part of the scheme to defraud by making numerous materially false and fraudulent representations and promises to Broker #1 in an effort to hedge his exposure on the Apple trade at Rochdale. Specifically, MILLER made materially false representations to Broker #1 in an effort to convince it that he was authorized to trade on behalf of yet another company, which will be referred to as “Firm A.” Through a series of material misrepresentations on October 25, 2012, the defendant caused Broker #1 to sell 500,000 shares of Apple stock, purportedly on behalf of the account of Firm A, when the defendant knew that he had no connection with Firm A and was not authorized to trade in its behalf.

Sadly this was a tissue of such transparent lies that even Broker #1 figured it out, and Miller never saw a dime of profit from his trade that did work out: "In the end, Broker #1 was able to trade out of the position at a profit," but kept it. Miller's win-either-way setup managed to lose both ways.

Plus now he gets to go to jail. Miller's plea agreement calls for him to do roughly 5 to 8 years, which probably seems a little harsh compared to the five year maximum facing Kareem Serageldin, whose RMBS mismarking contributed to Credit Suisse losing $2.6 billion in 2007. I guess blowing up Rochdale is a bigger deal than almost blowing up Credit Suisse, though I'm not clear on why.

Also not clear is who Miller's customer/co-conspirator was, or why he hasn't been charged yet. Or for that matter who Broker #1, who had the other leg of the trade, was. They don't exactly look great here. They let Miller open an account and shorted 500,000 shares for him, and only after the trade was completed did they decide to report him to the FBI. Maybe they were waiting to see how the trade turned out too.

SEC Charges Former Rochdale Securities Broker for Rogue Trades That Brought Down Firm [SEC]
U.S. v. David Miller information and plea agreement [DOJ]

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