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The Securities and Exchange Commission has brought charges against two Wall Street traders allegedly involved in a fraudulent “parking” scheme in which one temporarily placed securities in the other’s trading book to avoid penalties that would affect his year-end bonus.
And, once again, the government is relying on part on text messages that it says helps to prove its case.
The SEC’s Enforcement Division alleged that Thomas Gonnella solicited the assistance of Ryan King to evade a policy at his firm that penalizes traders financially if they hold securities for too long. Gonnella arranged for King, who worked at a different firm, to purchase several securities with the understanding that Gonnella would repurchase them at a profit for King’s firm, according to the charges. By parking the securities in King’s trading book in order to reset the holding period when he repurchased them, Gonnella’s intention was to avoid incurring any charges to his trading profits and ultimately his bonus for having aged inventory, the SEC alleged.
The alleged round-trip trades caused Gonnella’s firm to lose approximately $174,000. The SEC’s Enforcement Division alleged that after Gonnella’s supervisor began inquiring about the trades, Gonnella and King took steps to evade detection by interposing an interdealer broker in subsequent transactions and communicating by cell phone to avoid having conversations recorded by their firms. Gonnella and King were eventually fired by their firms for the misconduct, the SEC said.
King, who has cooperated with the SEC investigation, agreed to settle the charges by disgorging his profits and being barred from the securities industry. Any additional financial penalties will be determined at a later date. The SEC said that its litigation against Gonnella continues in a proceeding before an administrative law judge.
“Gonnella conducted trades for the purpose of avoiding his firm’s aged-inventory policy and protecting his own bonus,” said Andrew M. Calamari, director of the SEC’s New York Regional Office. “Even though Gonnella misled his employer and resorted to text messages on his cell phone to avoid detection, his tricks failed and we are holding him accountable for these deceptive trades.”
According to the SEC’s administrative orders, Gonnella parked a total of 10 securities with King. The SEC asserted that the scheme began on May 31, 2011, when Gonnella offered to sell King several asset-backed bonds issued by Bayview Commercial Asset Trust (BAYC). According to the SEC, Gonnella wrote in an instant message to King,
“i have 4 small bonds that i’m looking to turnover today for good ol’ month end/aging purposes ... i like these bonds ... and would more than likely have a higher bid for these later this wk when the calendar turns ...”
Gonnella’s reference to “aging purposes” was his firm’s aged-inventory policy, the SEC said. After King agreed, Gonnella sold him the securities and repurchased them before they had even settled in the account at King’s firm, the charges alleged.
The SEC’s Enforcement Division alleged that Gonnella contacted King again a few months later on August 29, writing,
“let’s talk tmrw. Have some aged bonds that I might offer you, if you’re game ... maybe do what we did a few months ago w/ some of those bayc’s ...”
After Gonnella sold three BAYC bonds to King, he repurchased two but did not immediately repurchase the other security, according to the SEC. As alleged, he later did so at a loss to King’s firm, but made them whole by selling two other bonds at prices favorable to King’s firm and unfavorable to his own firm. King then used the resulting profit on the two bonds to offset the original loss incurred, the SEC asserted.
The SEC alleged that, as their scheme began to unravel, Gonnella and King discussed their trading plans via cell phone and text messaging in an effort to avoid detection – and that cell phone records showed that they rarely contacted one another that way in the prior four years. For example, the SEC said, after discussing some trades in instant messages, Gonnella told King,
“Check your text [messages] in like 3 minutes.”
King allegedly responded,
“haha, ok ... sneaky sneaky.”
The order against Gonnella alleged that he willfully violated Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The order alleged that he willfully aided and abetted and caused violations of Section 17(a) of the Exchange Act and Rule 17a-3.
The order against King found that he willfully aided and abetted and caused Gonnella’s violations. The SEC said that it took into account King’s cooperation when agreeing to the settlement. King agreed to pay disgorgement of $22,606.80 and prejudgment interest of $1,503.66. The cease-and-desist order bars King from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization as well as participating in any penny stock offering, with the right to apply for re-entry after three years.
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