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Failure to Act in the Best Interests of Clients Leads to More Than €35 Million in Sanctions

Insider trading

Three individuals from the financial sector were found to have manipulated the markets and breached their professional obligations by the regulator in their jurisdiction. Furthermore, the men were acting in their capacity as employees when they committed the offences. This led to the companies for which they worked to be sanctioned.  

Those who participated in the scheme were all based in an EU country. They used wash trades to move the market, took part in front running of their clients and were guilty of failing to act in an honest, fair and professional manner. As a result, the three natural persons and the three organisations they acted on behalf of were fined a total of more than €35 million.  

This anonymised case study highlights the huge potential penalties for businesses that fail to properly monitor the actions of their staff and allow market manipulation to flourish in their workplaces.  

What are wash trades?  

A wash trade refers to a form of market manipulation where an investor simultaneously sells and buys the same financial instruments (such as stocks, commodities or derivatives) without any actual change in beneficial ownership or economic interest.   

Sometimes one party performs both sides of the transaction. However, it is also possible for the seller and buyer to be separate parties, working together to create the appearance of increased trading activity or volume in the market. This can potentially mislead other investors by giving a false impression of market demand or liquidity.  

As such, this practice is illegal in many jurisdictions, including in the European Union where the Market Abuse Regulation outlaws it.

AdobeStock_102021829 Failure to Act in the Best Interests of Clients

The background 

Over a period of nearly three weeks, Person A, who worked as a manager at an asset management company (Company A), a trader (Person B) at its trading division (Company B) and Person C, a broker at a brokerage (Company C), were found to have performed wash trades to influence the price of a specific market.  

In addition, authorities uncovered evidence of cherry picking, where the men executed orders without connecting them to a specific fund. They only allocated the trades when they knew whether they had gained or lost, allowing them to favour some clients over others. 

This was enough to prove that the individuals had failed in their duties to act in the best interests of clients and in an honest manner. According to the regulator, the employers had not managed conflict of interest properly, failed to exercise internal controls and had not taken steps to detect compliance risks.  

What happened next?  

The regulator found that the clients affected had lost nearly €50 million because of the actions of the men. Even before the regulator reached its conclusion, Company A paid back the full amount.  

The businesses were fined for failing to implement the correct checks and balances to prevent their employees from carrying out such activities. Company A faced a sanction of €25 million, with Company B and Company C paying €7 million and €5 million respectively.  

Person A was banned from asset management for ten years, Person B also received a ten-year ban from receiving and transmitting orders for both third parties and on his own account, whilst Person C was fined €20,000.  

How TradeLog helps 

TradeLog is personal account dealing software that helps you streamline your pre-clearance process. It detects personal trade requests that contravene your internal policies and alerts you to take action. This means you can reduce the chances of an employee using their personal account to carry out market abuse or market manipulation.  

You can request a demo of TradeLog right now for your business.  

References and further reading

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