The SEC fined and barred a bond trader for providing inaccurate bond valuation information to his broker-dealer employer, thereby causing financial statement discrepancies. According to the SEC, the respondent, a CMBS trader, provided inflated valuations to the internal Valuation Group and then lied about the bond coupons, thereby making it impossible for the Valuation Group to independently value the bonds. The SEC asserts the trader sought to appear more profitable and hide losses. His scheme was uncovered when he tried to securitize the bonds as part of the firm’s risk reduction policy.
OUR TAKE: The pricing of any Level III security depends heavily on inputs provided by the portfolio manager or trader. Even independent verification may not uncover a problem if the PM/trader outright lies about the security’s characteristics. Perhaps, firms that hold a large inventory of Level III securities should have another expert PM/trader conduct a review.