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A senior fund manager at a European asset management firm was found to have been front-running his company’s trades to make more than €8 million in profits. Using inside information about the firm’s upcoming moves, the employee bought and sold stock accordingly, betting on the direction he predicted the market would move.
However, his personal trading was exposed, leading the way for a prosecution that saw him jailed and served with a financial sanction of six times the profit he had made in trading. The company that employed him was also left with questions over the effectiveness of its employee trading policy.
This article shows the importance of monitoring the trading activity of employees to prevent conflicts of interest and maintaining strict procedures relating to inside information.
Background
The fund manager reported that he had received a lower-than-expected pay rise after taking on additional duties and decided he would take it upon himself to find a “different way of rewarding himself.” This involved using privileged and non-public information about the buy and sell orders that the asset management firm was going to make to judge the effect that would have on the price of the stock in question when it became public knowledge.
He used this to inform his trades through a brokerage account at a bank before his employer made its moves, benefiting from the movement in the price after the asset management firm had bought or sold. This is termed front-running and is classed as a type of market abuse according to the Market Abuse Regulation.
Furthermore, the use of non-public information to inform trades is classed as insider dealing. The fund manager is said to have carried out this plan on at least 55 occasions over five months, as well as unlawfully distributing inside information about the trades to a friend 19 times.
What happened next?
Issuers of derivatives and the bank through which the fund manager made his personal trades informed the country’s regulator of suspicious trading activity. After an investigation, the fund manager lost his job and the regulator prosecuted him.
Although the fund manager admitted his crime and cooperated with the prosecution, the judge sentenced him to three and a half years in prison, with a sanction of €45 million, representing the aggregate trading volume of the 55 transactions.
How could this have been prevented?
His employer acted swiftly to dismiss him once his crimes came to light, but the case highlights how failing to adequately manage employees’ personal trades can lead to a conflict of interest between employer and employee.
The Markets in Financial Instruments Directive (MiFID II) states that “an investment firm shall establish adequate policies and procedures sufficient to ensure compliance of the firm including its managers, employees and tied agents with its obligations under this Directive as well as appropriate rules governing personal transactions by such persons.” This did not happen in this case and clients of the asset management firm might be understandably concerned about the consequences of this failure.
Furthermore, creating insider lists in accordance with MAR and having employees acknowledge their responsibilities not to act on that information or distribute it unlawfully is essential to compliance. The company’s actions in this regard might be questioned too, as something went wrong to allow the defendant to carry out his crime.
Improve personal account dealing compliance
TradeLog helps you maintain compliance regarding the trades your employees make on their own accounts. It creates a pre-clearance procedure that allows you to restrict certain personal trades and means that employees cannot gain permission to make them. It also monitors their trading to provide automated surveillance and violation notifications. If you want to cut down on admin whilst providing a seamless online trade process that maintains compliance, request a demo of TradeLog today.
References and further reading
- Faster and simpler employee trade monitoring
- Create an employee trading policy
- Essential features for pre-trade clearance
- Stay compliant with MAR and MiFID II
- Better market abuse monitoring
