The SEC settled fraud charges against a former head trader of residential mortgage-backed securities ("RMBS").
The SEC found that the trader:
- misled customers, with whom he was negotiating the sale of RMBS, on price and compensation; and
- misrepresented the sale of the RMBS as out of his company's inventory rather than as a trade between customers.
In its Order, the SEC noted that because "RMBS are generally illiquid, and discovering a market price for them is difficult, . . . participants in the RMBS market rely on informal sources, such as the dealer with whom they trade, for this information." SEC Enforcement Division Complex Financial Instruments Unit Chief Michael J. Osnato emphasized that the trader breached investors' good faith:
With no public exchange showing the price for each RMBS trade as it occurs, investors purchasing these securities rely on dealers to be honest about the purchase price they paid. [The trader] repeatedly abused his fundamental duty to serve as an honest transmitter of market information so he could increase [his company's] trading profits and, indirectly, his own compensation.
The trader agreed to pay $200,000 in disgorgement, $50,000 in prejudgment interest, and a $150,000 penalty. Further, the SEC barred the trader from working in the securities industry.
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