Round Trip

Sweating the rogue trader

Because even special projects can be interrupted by even more special projects, I find myself on a plane to Spain with our Chief Compliance Officer, ready to give a grilling to a salesperson who has been robbing the Firm blind.

Dave, the Compliance guy, is fairly new to the Firm and doesn’t appear to have a clue how this should be approached. I suggest that he should stress his exalted title at the beginning of the meeting, scowl a lot and leave the talking to me.

When we step out of the aeroplane at Madrid Barajas and I smell the hot evening air carrying the whiff of Ducados and churros to me, I exult in having chosen to fly in the night before the meeting.

It has been a long time since I last enjoyed a night out in Madrid.

First, Dave must be ditched. I yawn my way through a single drink with him, over tapas at the hotel bar, then lead the way to the lift for an early night. It can’t be later than about ten-fifteen and Dave looks disappointed, but I stress what an important day it is tomorrow.

I spend about twenty minutes watching television, then head back downstairs to go out. As I leave, I spot Dave in the bar, having a rebellious extra drink. This shows promise, but I haven’t the patience to give someone who can’t speak a word of Spanish an induction into the delights of Madrid after dark.

Call me selfish, but I head off alone to one of the flamenco tablaos underneath the Plaza Mayor where, as expected, I encounter congenial company who happen to know the whereabouts of the after-show party.

— God, Martin, you look rough

— Didn’t sleep well. I never do away from home. And I think the gambas on the bar may not have helped

— I’m not too bright myself. I nipped back down for another drink after you had gone to bed. But there wasn’t a lot going on. What’s the order of play for today?

— As far as Federico knows, we have one meeting scheduled with him. That’s his chance to cough

— And if he doesn’t?

— He won’t. The first meeting is just so that we can document that he has actively lied to Audit and Compliance

— And then?

— Then in the afternoon we tell him what we’ve got on him and he really coughs. Maybe not the whole story, but enough for us to string him up

— Then what?

— Then we let him off the hook. We permit him to resign. He’ll sign that letter so fast when he realises he can stop the fraud from being made public

— Why do we do that? Can’t he go off and do the same thing to another firm?

— Why is that our problem? If he goes off to our competitors and nicks a few million from them, why would we mind?

— If this had happened in the UK or he was a registered person, we would have to submit a dirty withdrawal notice, giving all the circumstances, otherwise we would be in breach

— Now do you understand why we don’t register people in the remote offices unless we absolutely have to?

— It seems a bit irresponsible. Like we’re just passing on the problem to someone else

— If it makes you feel any better, it isn’t you that has been irresponsible. It’s the management team that wouldn’t invest the money for a proper control infrastructure. That’s what let Fede get away with stuff like this

— You mean surveillance routines?

— You wouldn’t even need surveillance if there was proper supervision. If anyone in his chain of command understood his activities and bothered to check them from time to time

— So Fede, do you mind if I recap our conversation so far?

— Recap?

— Summarise. If I summarise what we’ve been talking about this morning

— Not at all

— As far as you are concerned, the prices you have quoted for our warrants have always represented the fair price for those warrants, bearing in mind the…?

— Price of the underlying stock, the volatility of that stock, how long the warrant has to run and whether it is in or out of the money

— And the prevailing interest rate, correct?

— Correct

— And any sharp intra-day changes in the warrant price would be caused by a corresponding change in one or more of these factors

— I would suppose so, yes

— So that anyone who made consistent profits against our prices…?

— Was a good trader

— We have discussed specific accounts, such as Mato Grueso

— Who I don’t know, I already told you, because they come in via an internet trading service, as do many of the accounts which trade against our prices

— So you have no specific knowledge of any of the accounts we have mentioned?

— No

— And you have no financial interest in any of these accounts?

— No. Of course not

— I have summarised what we have discussed on this sheet of paper. I would like you to read it and sign it

— Should I have a lawyer with me?

— If anything on that paper is not correct, let me know and I will correct it. If you are happy that this reflects what we have discussed, then presumably you will be happy to sign

— Let me think about it

— Mr Ruiz, we have a plane to catch, please don’t waste our time. The most important clause of this piece of paper is that you have given a full and accurate answer to the questions asked of you by Compliance and Audit. If you cannot sign that statement, we may have to start again

— Here, I will sign the paper. But I will complain to my manager in London about your hostile attitude towards me, when I have been as open with you as I can

— Thank you for your signature. Now we will take lunch. Please be back here at three pm

— I thought we were finished

— No Mr Ruiz, we still have a long way to go

— What do you mean?

— This afternoon, you will give us a fuller account of your activities

— I can’t tell you any more than I already have

— So far, you have told us precisely nothing. Those answers you have given us, and signed off as being complete and accurate, are full of provable omissions and lies. This afternoon we will start going through the audit trail which backs up what I am saying

— What audit trail?

— To start with, we have the last three months of your telephone logs, showing incoming and outgoing calls, including a number of calls to the internet broker’s technical helpdesk

— We are always calling brokers. It’s normal

— We have telephone voice recordings for at least the last month

— Oh

— And we have weblogs showing all transactions entered at the online brokerage from your PC, at a time when you were known to be in the office. As if all of that wasn’t enough, you were careless enough to get your brokerage statements sent to your work email address…

— You have been looking through my email? I thought that was against the law?

— If you had checked the notice on your login screen you would have found that by logging onto your PC you are explicitly authorising the Firm to monitor your activity, to check its compliance with the Use of Technology Policy

— I’ve never heard of that policy

— Strange. You signed to say that you had read it and understood it on the day you joined the Firm. I don’t want you to blurt out the first thing that comes into your head right now. We’ve had enough of that this morning. I want us all to go and have lunch and then I want a full and frank disclosure from you, enabling me to tear this one up and start again. Please be back at three pm prompt

— You missed your vocation You should have been a policeman

— I thought I was

— You knew that he would tell us everything didn’t you? After he had sweated it out over lunchtime

— It was either that or throw himself off a bridge. And he didn’t look the type for that

— I’m still not sure I know how he was making any money out of this. What exactly was the scam?

— It only works with illiquid securities, where no-one in the market has a clear idea of what the right price should be and you don’t have thousands of people following every price movement.

Fede made prices for our own warrants, mainly for the ones which were well out of the money and trading at a few Eurocents. He would knock the price off by one or two cents and no-one would really notice. In those products we are the only market-maker, so there’s no-one to compare us against.

He would trade on his internet account, buying up our cheap stock, then mark it back up to the right price and flog it back to us. He was making a steady five thousand euros on every round trip, nothing too greedy, but mounting up into a sizeable nest-egg for himself

— Amazing. How did we spot him?

— We didn’t. The Compliance Department at the internet broker has some proper surveillance software and noticed that he was making straight line profits, always at Durante Brothers’ expense. They told the regulator that they thought something was amiss and the regulator told us. Not attributably, of course. They just suggested we pay special attention to a certain account and a certain salesperson

— They even knew who he was?

— Yes, they had a list of our staff and matched his name against the person who opened the brokerage account

— I can’t believe he opened an account in his own name

— I can’t believe he had the statements emailed to his work inbox. Do you think we can squeeze in another drink before we board?

Dave doesn’t ask and I don’t tell him why I’m so adept at manoeuvring people into resigning, should it be in the Firm’s best interests. It’s because I have spent rather too long on the other side of that table.

Many thanks for reading!

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