Illegal Bond Trading Tactics

Trader at a trading desk
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As a result of recent financial legislation (such as the 2010 Dodd-Frank bill), many long-established securities trading practices on Wall Street are under attack, to the point where utilizing them can risk heavy fines and/or jail time.

For example, under the principle of caveat emptor (buyer beware), it used to be permissible (though obviously unethical) for a trader or bond salesman to jack up the price to a prospective buyer by making false claims about what it cost to acquire that bond for resale, or how brisk the demand for it is among competing potential buyers (if, indeed, any really do exist).

Now these tactics and other similar are largely illegal.

The Litvak Case: 

After being convicted by a jury in March 2014 of securities fraud and the making of false statements to client, in July 2014, a former bond trader (fired in 2011) for Jefferies Group LLC, Jesse Litvak, was hit with a 2-year federal prison sentence. His specific offense was enticing clients to pay allegedly inflated sums for bonds by claiming that he had acquired them at much higher prices than those at which he actually did. This sentence sent shockwaves throughout the financial services industry, since Litvak was engaging in a widespread, long-established sales tactic.

Litvak's appeal of his sentence has continued into 2015. His defense rests mainly on the assertion that his clients were sophisticated investors who were fully capable of making rational assessments of the intrinsic value of the bonds that the purchased, and that their own analysis was thus the key, determining factor in their buying decisions.

He has been out on bail since October 2014, the court finding that reversal of his conviction has a high probability, on the basis of his motion.

Jefferies, now a division of Leucadia National Corp., disclosed an agreement in January 2014 to pay $25 million to end further federal regulatory actions pursuant to Litvak's actions.

Its settlement also included bringing on a compliance consultant, tightening its procedures, and putting them under annual review, if not more frequently.

Financial Industry Reaction: 

As a result, banks and brokerage firms are moving swiftly to ensure that they are not hit with similar charges. For example, legal and compliance departments are now placing strict limits on what traders and bond salesmen can say to clients about prospective sales, in order to prevent the making of misleading or downright false claims that now can lead to lawsuits or regulatory actions. In support of this effort are heightened surveillance of these employees, as well as required training sessions. These initiatives are expected to continue at most firms regardless of whether Litvak is successful in his appeal.

Among the major firms known to be putting initiatives such as these into place are:

  • Citigroup
  • Deutsche Bank
  • Goldman Sachs
  • Bank of America
  • JPMorgan Chase
  • Barclays

Additionally, Barclays, Citigroup, Deutsche Bank, Morgan Stanley, Royal Bank of Scotland (RBS) and UBS have reportedly been under investigation by the SEC and the special inspector general for TARP (Troubled Asset Relief Program) in relation to similar charges.

As far as surveillance of bond traders is concerned, firms such as Citigroup and Deutsche Bank reportedly are significantly lowering the threshold for what is considered to be a suspiciously large gain or loss on a given set of transactions. Goldman Sachs, meanwhile, reportedly is drafting new rules governing what traders can tell clients about previous transactions.

Source: "Bank Rein In Common Sales Tricks: Former bond trader's appeal watched closely," The Wall Street Journal, May 13, 2015.