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{{Short description|Concept in financial instrument valuation}}
{{AFC submission|t||ts=20201105200501|u=2604:2000:E010:1100:CD97:9741:3CDB:E36C|ns=118|demo=}}<!-- Important, do not remove this line before article has been created. -->
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'''Mismarking''' in [[securities]] [[Valuation (finance)|valuation]] takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional [[fraudulent]] mispricing.<ref>[https://www.bis.org/bcbs/qisoprisknote.pdf "1QIS 2 - Operational Risk Loss Data – 4 May 2001,"] [[Bank of International Settlements]].</ref><ref name="auto4">{{Cite web|url=https://www.aoinvestigationsinsight.com/amid-falling-markets-valuation-challenges-and-mis-marking-fraud-risks-rise/ |author=Eugene Ingoglia |author2=Todd Fishman, Mark Daniels|title=Amid falling markets, valuation challenges and mis-marking fraud risks rise|work=Investigations Insight|date=April 22, 2020}}</ref> Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities' [[net asset value]], or NAV), and thus misrepresents performance.<ref name="auto7">{{Cite journal|author=George J. Benston|title=Fair-value accounting: A cautionary tale from Enron|journal=Journal of Accounting and Public Policy |volume=25 |issue=4 |pages=465–484 |date=July–August 2006 |doi=10.1016/j.jaccpubpol.2006.05.003}}</ref><ref>Kent Oz (2009). [https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1344&context=jcfl "Independent Fund Administrators As A Solution for Hedge Fund Fraud,"] ''Fordham Journal of Corporate & Financial Law''.</ref> When a [[Trader (finance)|trader]] engages in mismarking, it allows him to obtain a higher [[Bonus payment|bonus]] from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing.<ref name="auto7"/>


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Mismarking is an element of [[operational risk]].<ref>{{Cite web|url=https://www.marketscreener.com/quote/stock/LIONTRUST-ASSET-MANAGEMEN-4002273/news/Liontrust-Asset-Management-Annual-Report-Financial-Statements-2020-30961446/|title=Liontrust Asset Management: Annual Report & Financial Statements 2020|website=MarketScreener|date=July 21, 2020}}</ref> The trader engaging in mismarking is sometimes referred to as a "rogue trader."<ref>Peter Nash (2017). [https://books.google.com/books?id=NiA3DwAAQBAJ&dq=%22mismarking%22+trader&pg=PA209 ''Effective Product Control; Controlling for Trading Desks''], Wiley.</ref>
⚫
'''Mismarking''' in [[securities]] [[Valuation (finance)|valuation]] takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional [[fraudulent]] mispricing.<ref>[https://www.bis.org/bcbs/qisoprisknote.pdf "1QIS 2 - Operational Risk Loss Data – 4 May 2001,"] [[Bank of International Settlements]].</ref><ref name="auto3">{{Cite web|url=https://markets.businessinsider.com/news/stocks/morgan-stanley-fires-places-on-leave-four-traders-mismarking-securities-2019-11-1028727080|title=Morgan Stanley reportedly fires or places on leave at least 4 traders while investigating millions in hidden losses &#124; Markets Insider|author=Daniel Strauss|date=November 29, 2019|website=Business Insider}}</ref><ref name="auto4">{{Cite web|url=https://www.aoinvestigationsinsight.com/amid-falling-markets-valuation-challenges-and-mis-marking-fraud-risks-rise/|author=Eugene Ingoglia, Todd Fishman, Mark Daniels|title=Amid falling markets, valuation challenges and mis-marking fraud risks rise|work=Investigations Insight|date=April 22, 2020}}</ref> Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities' [[net asset value]], or NAV), and thus misrepresents performance.<ref name="auto6">{{Cite web|url=https://www.financemagnates.com/executives/moves/morgan-stanley-names-two-new-heads-for-fx-options-desk/|title=Morgan Stanley Names Two New Heads for FX Options Desk; Silverman and Jeurissen are replacing Thiago Melzer, who was fired in November amid allegations of mismarking securities.|date=January 31, 2020|author=Aziz Abdel-Qader|website=Finance Magnates }}</ref><ref name="auto7">{{Cite web|url=https://citeseerx.ist.psu.edu/messages/downloadsexceeded.html|author=George J. Benston|title=Fair-value accounting: A cautionary tale from Enron|work=Journal of Accounting and Public Policy|year=2006}}</ref><ref>Kent Oz (2009). [https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1344&context=jcfl "Independent Fund Administrators As A Solution for Hedge Fund Fraud,"] ''Fordham Journal of Corporate & Financial Law''.</ref> When a [[Trader (finance)|trader]] engages in mismarking, it allows him to obtain a higher [[Bonus payment|bonus]] from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing.<ref name="auto6"/><ref name="auto7"/>


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During market downturns, determining the value of [[illiquid securities]] held in portfolios becomes especially challenging, in part because of the amount of debt associated with these securities and in part because of fewer mechanisms for [[price discovery]].<ref name="auto4"/> As a result, during such periods illiquid securities are especially susceptible to fraudulent mismarking.<ref name="auto4"/>
⚫
Mismarking is an element of [[operational risk]].<ref>{{Cite web|url=https://www.marketscreener.com/quote/stock/LIONTRUST-ASSET-MANAGEMEN-4002273/news/Liontrust-Asset-Management-Annual-Report-Financial-Statements-2020-30961446/|title=Liontrust Asset Management: Annual Report & Financial Statements 2020|website=MarketScreener|date=July 21, 2020}}</ref> The trader engaging in mismarking is sometimes referred to as a "rogue trader."<ref>Peter Nash (2017). [https://www.google.com/books/edition/Effective_Product_Control/NiA3DwAAQBAJ?hl=en&gbpv=1&dq=%22mismarking%22+trader&pg=PA209&printsec=frontcover ''Effective Product Control; Controlling for Trading Desks'',] Wiley.</ref>

⚫
During market downturns, determining the value of [[illiquid securities]] held in portfolios becomes especially challenging, in part because of the amount of debt associated with these securities and in part because of fewer mechanisms for [[price discovery]].<ref name="auto4"/> As a result, during such periods illiquid securities are especially susceptible to fraudulent mismarking.<ref name="auto4"/>


==Notable cases==
==Notable cases==
In 2007, two [[Credit Suisse]] [[Trader (finance)|trader]]s pleaded guilty to mismarking their [[securities position]]s to overvalue them by $3 billion, avoid losses, and increase their year-end [[Bonus payment|bonus]]es.<ref name="auto">{{Cite web|url=https://dealbook.nytimes.com/2012/02/01/3-ex-traders-at-credit-suisse-charged-with-fraud/|title=3 Former Traders at Credit Suisse Charged With Bond Fraud|author=Peter Lattman and Peter Eavis|date=February 2, 2012|website=DealBook}}</ref><ref>{{Cite web|url=https://dealbook.nytimes.com/2013/04/12/ex-credit-suisse-executive-pleads-guilty-to-inflating-value-of-mortgage-bonds/|title=Former Credit Suisse Executive Pleads Guilty to Inflating the Value of Mortgage Bonds|first=Peter|last=Lattman|date=April 12, 2013|website=DealBook}}</ref><ref>{{Cite web|url=https://www.housingwire.com/articles/sec-charges-four-credit-suisse-bankers-subprime-bond-fraud/|work=Housing Wire|title=SEC charges four Credit Suisse bankers in subprime bond fraud|author= Jacob Gaffney|date=February 1, 2012}}</ref> Federal prosecutors and the [[Securities and Exchange Commission]] charged that the traders' goal was to obtain lavish year-end bonuses that the mismarking would lead to.<ref>{{Cite web|url=https://www.sec.gov/news/press-release/2012-2012-23htm|title= SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme During Credit Crisis|website=SEC.gov|date=February 1, 2012 }}</ref><ref name="auto2">{{Cite web|url=https://www.afr.com/markets/equity-markets/former-credit-suisse-traders-charged-with-fraud-20120202-i3p6a|title=Former Credit Suisse traders charged with fraud; US prosecutors charged three former Credit Suisse traders with inflating the value of mortgage bonds in 2007 as the housing market deteriorated, saying they used the scheme to boost their year-end bonuses.|date=February 2, 2012|website=Australian Financial Review}}</ref> The traders engaged in what ''[[The New York Times]]'' called "a brazen scheme to artificially increase the price of [[bond]]s on their books to create fictitious profits."<ref name="auto"/> A team of traders, facing an inquiry from Credit Suisse’s internal controls Price Testing group, justified their bond portfolio’s inflated value by obtaining "independent" marks from other banks’ [[trading desk]]s.<ref name="auto"/><ref name="auto5">Joe McGrath (2020). [https://digitalcommons.law.seattleu.edu/cgi/viewcontent.cgi?article=2646&context=sulr "Why Do Good People Do Bad Things? A Multi-Level Analysis of Individual, Organizational, and Structural Causes of White-Collar Crime,"] ''Seattle University Law Review''.</ref> The traders secured sham "independent" marks for illiquid securities that they held position in from friends who worked at other financial firms.<ref name="auto2"/><ref name="auto"/><ref name="auto5"/> Their friends generated prices that valued a number of bonds at the prices that the traders requested, which the traders then recorded as the true value of the bonds.<ref name="auto"/><ref name="auto5"/> The false profits allowed the head of the group to secure a cash [[bonus]] of more than $1.7 million and a stock award of more than $5.2 million.<ref name="auto"/> The bank was not charged in the case.<ref name="auto"/> Credit Suisse’s outside auditor discovered the mismarkings during an audit.<ref>{{Cite web|url=https://www.reuters.com/article/us-creditsuisse-idUSL1645033720080219|title=Credit Suisse reveals $2.85 billion write-downs|author=Andrew Hurst|date=February 19, 2008|publisher=Reuters}}</ref> Credit Suisse took a $2.65 billion write-down after discovering their traders' mismarking.<ref name="auto2"/>
In 2007, two [[Credit Suisse]] [[Trader (finance)|trader]]s pleaded guilty to mismarking their [[securities position]]s to overvalue them by $3 billion, avoid losses, and increase their year-end [[Bonus payment|bonus]]es.<ref name="auto">{{Cite web|url=https://dealbook.nytimes.com/2012/02/01/3-ex-traders-at-credit-suisse-charged-with-fraud/|title=3 Former Traders at Credit Suisse Charged With Bond Fraud|author=Peter Lattman and Peter Eavis|date=February 2, 2012|website=DealBook}}</ref><ref>{{Cite web|url=https://dealbook.nytimes.com/2013/04/12/ex-credit-suisse-executive-pleads-guilty-to-inflating-value-of-mortgage-bonds/|title=Former Credit Suisse Executive Pleads Guilty to Inflating the Value of Mortgage Bonds|first=Peter|last=Lattman|date=April 12, 2013|website=DealBook}}</ref><ref>{{Cite web|url=https://www.housingwire.com/articles/sec-charges-four-credit-suisse-bankers-subprime-bond-fraud/|work=Housing Wire|title=SEC charges four Credit Suisse bankers in subprime bond fraud|author= Jacob Gaffney|date=February 1, 2012}}</ref> Federal prosecutors and the [[Securities and Exchange Commission]] charged that the traders' goal was to obtain lavish year-end bonuses that the mismarking would lead to.<ref>{{Cite web|url=https://www.sec.gov/news/press-release/2012-2012-23htm|title= SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme During Credit Crisis|website=SEC.gov|date=February 1, 2012 }}</ref><ref name="auto2">{{Cite web|url=https://www.afr.com/markets/equity-markets/former-credit-suisse-traders-charged-with-fraud-20120202-i3p6a|title=Former Credit Suisse traders charged with fraud; US prosecutors charged three former Credit Suisse traders with inflating the value of mortgage bonds in 2007 as the housing market deteriorated, saying they used the scheme to boost their year-end bonuses.|date=February 2, 2012|website=Australian Financial Review}}</ref> The traders engaged in what ''[[The New York Times]]'' called "a brazen scheme to artificially increase the price of [[Bond (finance)|bond]]s on their books to create fictitious profits."<ref name="auto"/> A team of traders, facing an inquiry from Credit Suisse's internal controls Price Testing group, justified their bond portfolio's inflated value by obtaining "independent" marks from other banks' [[trading desk]]s.<ref name="auto"/><ref name="auto5">Joe McGrath (2020). [https://digitalcommons.law.seattleu.edu/cgi/viewcontent.cgi?article=2646&context=sulr "Why Do Good People Do Bad Things? A Multi-Level Analysis of Individual, Organizational, and Structural Causes of White-Collar Crime,"] ''Seattle University Law Review''.</ref> The traders secured sham "independent" marks for illiquid securities that they held position in from friends who worked at other financial firms.<ref name="auto2"/><ref name="auto"/><ref name="auto5"/> Their friends generated prices that valued a number of bonds at the prices that the traders requested, which the traders then recorded as the true value of the bonds.<ref name="auto"/><ref name="auto5"/> The false profits allowed the head of the group to secure a cash [[Bonus payment|bonus]] of more than $1.7 million and a stock award of more than $5.2 million.<ref name="auto"/> The bank was not charged in the case.<ref name="auto"/> Credit Suisse's outside auditor discovered the mismarkings during an audit.<ref>{{Cite web|url=https://www.reuters.com/article/us-creditsuisse-idUSL1645033720080219|title=Credit Suisse reveals $2.85 billion write-downs|author=Andrew Hurst|date=February 19, 2008|publisher=Reuters}}</ref> Credit Suisse took a $2.65 billion write-down after discovering their traders' mismarking.<ref name="auto2"/>


Also in 2007, the [[Royal Bank of Canada]], Canada's biggest bank, fired several traders in its corporate bond business, after another trader accused them of mismarking bonds the bank held by overpricing them, and marked down the values of the bonds and recognized $13 million of trading losses relating to the bonds.<ref name="auto1">{{Cite web|url=https://www.theglobeandmail.com/report-on-business/trader-alleges-rbc-undervalued-bonds/article20403615/|date=October 26, 2007 |author=Tara Perkins|title=Trader alleges RBC undervalued bonds|work=The Globe and Mail}}</ref> The bank said it investigated the accusations, and took remedial action.<ref name="auto1"/> ''[[The Globe and Mail]]'' noted: "traders might have an incentive to boost [the bonds'] prices because it could have an impact on their bonuses."<ref name="auto1"/>
Also in 2007, the [[Royal Bank of Canada]], Canada's biggest bank, fired several traders in its corporate bond business, after another trader accused them of mismarking bonds the bank held by overpricing them, and marked down the values of the bonds and recognized $13 million of trading losses relating to the bonds.<ref name="auto1">{{Cite news|url=https://www.theglobeandmail.com/report-on-business/trader-alleges-rbc-undervalued-bonds/article20403615/|date=October 26, 2007 |author=Tara Perkins|title=Trader alleges RBC undervalued bonds|work=The Globe and Mail}}</ref> The bank said it investigated the accusations, and took remedial action.<ref name="auto1"/> ''[[The Globe and Mail]]'' noted: "traders might have an incentive to boost [the bonds'] prices because it could have an impact on their bonuses."<ref name="auto1"/>


In 2008, a [[Bank of Montreal]] trader pleaded guilty to intentionally mismarking his trading book in order to increase his bonus from the bank.<ref>{{Cite web|url=https://www.thestar.com/business/2008/11/19/rogue__gas_trader_admits_to_fraud.html|title=Rogue gas trader admits to fraud|date=November 19, 2008|author=Rita Trichur|work=The Star}}</ref><ref>{{Cite web|url=https://www.theglobeandmail.com/report-on-business/former-trader-pleads-guilty-in-fraud-that-cost-bmo-850-million/article590543/|title=Former trader pleads guilty in fraud that cost BMO $850-million|work=The Globe and Mail|date=November 18, 2008|author=Tara Perkins}}</ref>
In 2008, a [[Bank of Montreal]] trader pleaded guilty to intentionally mismarking his trading book in order to increase his bonus from the bank.<ref>{{Cite news|url=https://www.thestar.com/business/2008/11/19/rogue__gas_trader_admits_to_fraud.html|title=Rogue gas trader admits to fraud|date=November 19, 2008|author=Rita Trichur|work=The Star}}</ref><ref>{{Cite news|url=https://www.theglobeandmail.com/report-on-business/former-trader-pleads-guilty-in-fraud-that-cost-bmo-850-million/article590543/|title=Former trader pleads guilty in fraud that cost BMO $850-million|work=The Globe and Mail|date=November 18, 2008|author=Tara Perkins}}</ref>


In 2010, a [[Merrill Lynch]] trader in London who mispriced positions he had on behalf of the bank by $100 million to cover up his losses was banned by the United Kingdom's [[Financial Services Authority]] (FSA) from working in the securities industry in the UK for at least five years.<ref>{{Cite web|url=https://www.reuters.com/article/uk-britain-fsa-merrill-idUKTRE62F1IB20100317|title=FSA bans former Merrill Lynch trader|first=Clara Ferreira-Marques, Kirstin|last=Ridley|date=March 17, 2010|publisher=Reuters}}</ref><ref>{{Cite web|url=https://www.thetimes.co.uk/article/merrill-trader-banned-by-fsa-for-mismarking-8bl2cpqw0bh|title=Merrill trader banned by FSA for mismarking|date=March 16, 2010|author=Ian King|work=The Times}}</ref><ref>{{Cite book|url=https://www.scribd.com/book/346744345/Barometer-of-Fear-An-Insiders-Account-of-Rogue-Trading-and-the-Greatest-Banking-Scandal-in-History|title=Barometer of Fear: An Insiders Account of Rogue Trading and the Greatest Banking Scandal in History|author= Alexis Stenfors|year=2017|publisher=Zed Books}}</ref><ref>{{Cite web|url=https://www.wsj.com/articles/a-disgraced-traders-struggle-for-redemption-1461949767|title=A Disgraced Trader's Struggle for Redemption|first=David|last=Enrich|date=April 29, 2016|work=The Wall Street Journal}}</ref>
In 2010, a [[Merrill Lynch]] trader in London who mispriced positions he had on behalf of the bank by $100 million to cover up his losses was banned by the United Kingdom's [[Financial Services Authority]] (FSA) from working in the securities industry in the UK for at least five years.<ref>{{Cite web|url=https://www.reuters.com/article/uk-britain-fsa-merrill-idUKTRE62F1IB20100317|title=FSA bans former Merrill Lynch trader|first=Clara Ferreira-Marques, Kirstin|last=Ridley|date=March 17, 2010|publisher=Reuters}}</ref><ref>{{Cite news|url=https://www.thetimes.co.uk/article/merrill-trader-banned-by-fsa-for-mismarking-8bl2cpqw0bh|title=Merrill trader banned by FSA for mismarking|date=March 16, 2010|author=Ian King|work=The Times}}</ref><ref>{{Cite book|url=https://www.scribd.com/book/346744345/Barometer-of-Fear-An-Insiders-Account-of-Rogue-Trading-and-the-Greatest-Banking-Scandal-in-History|title=Barometer of Fear: An Insiders Account of Rogue Trading and the Greatest Banking Scandal in History|author= Alexis Stenfors|year=2017|publisher=Zed Books}}</ref><ref>{{Cite news|url=https://www.wsj.com/articles/a-disgraced-traders-struggle-for-redemption-1461949767 |url-access=subscription |title=A Disgraced Trader's Struggle for Redemption|first=David|last=Enrich|author-link=David Enrich|date=April 29, 2016|newspaper=[[The Wall Street Journal]]}}{{cbignore}}</ref>


Also in 2010, a trader at [[Toronto Dominion Bank]] in the UK was fined £750,000 ($1.16 million) by the FSA for intentionally mismarking his trading positions.<ref>{{Cite web|url=https://online.wsj.com/article/SB10001424053111904563904576584861981916594.html|title=U.K. Sets Its Sights on 'Rogue' Traders|first=David Enrich, Cassell Bryan-Low and Sara Schaefer|last=Muñoz|date=September 22, 2011|work=The Wall Street Journal}}</ref>
Also in 2010, a trader at [[Toronto Dominion Bank]] in the UK was fined £750,000 ($1.16 million) by the FSA for intentionally mismarking his trading positions.<ref>{{Cite web|url=https://online.wsj.com/article/SB10001424053111904563904576584861981916594.html|title=U.K. Sets Its Sights on 'Rogue' Traders|first=David Enrich, Cassell Bryan-Low and Sara Schaefer|last=Muñoz|date=September 22, 2011|work=The Wall Street Journal}}</ref>
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Also in 2016, a trader at a company authorized by the [[Dubai Financial Services Authority]] (DFSA) was banned for six years from performing any functions in connection with the provision of financial services in the [[Dubai International Financial Centre]] after he mismarked his trading book.<ref>[https://www.arabianbusiness.com/former-dubai-trader-banned-for-11m-mismarking-scandal-631424.html "Former Dubai trader banned for $11m 'mismarking' scandal"], ''Arabian Business'', May 11, 2016.</ref>
Also in 2016, a trader at a company authorized by the [[Dubai Financial Services Authority]] (DFSA) was banned for six years from performing any functions in connection with the provision of financial services in the [[Dubai International Financial Centre]] after he mismarked his trading book.<ref>[https://www.arabianbusiness.com/former-dubai-trader-banned-for-11m-mismarking-scandal-631424.html "Former Dubai trader banned for $11m 'mismarking' scandal"], ''Arabian Business'', May 11, 2016.</ref>


In 2019, SEC announced settled charges against a former Citigroup Global Markets Inc. (CGMI) trader for mismarking a book of illiquid credit derivatives while sustaining losses from unauthorized trading in U.S. Treasury securities (USTs).<ref>[https://www.sec.gov/enforce/34-87127-s "SEC Charges Former Citi Trader with Mismarking and Unauthorized Trading"], ''SEC.gov'', Sep 26, 2019.</ref>
In 2019, [[Morgan Stanley]] fired or placed on leave four traders for suspected securities mismarking.<ref name="auto3"/> The firm suspected that $100-140 million in losses were concealed by the mismarking of the value of the securities.<ref name="auto3"/><ref>{{Cite web|url=https://www.bloomberg.com/news/articles/2019-11-28/morgan-stanley-ousts-fx-traders-amid-multi-million-dollar-loss|title=Morgan Stanley Ousts FX Traders as It Probes Concealed Loss|date=November 28, 2019|work=Bloomberg|author=Stefania Spezzati, Donal Griffin, and Viren Vaghela}}</ref><ref name="auto6"/>

In 2022, SEC charged James Velissaris, former Chief Investment Officer and founder of Infinity Q Capital Management, with overvaluing assets by more than $1 billion while pocketing tens of millions of dollars in fees.<ref>{{cite web |title=SEC Actions: Fund Investment "Mispricing" & "Mismarking" Cases 2022 |url=https://www.houlihancapital.com/sec-actions-fund-investment-mispricing-mismarking-cases-2022/ |website=www.houlihancapital.com |date=4 April 2022 |access-date=20 September 2022}}</ref>


==Regulatory action==
==Regulatory action==
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*[[Bond valuation]]
*[[Bond valuation]]
*[[Securities fraud]]
*[[Securities fraud]]
*[[Valuation control]]


== References ==
== References ==
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{{Fraud}}
{{Fraud}}
{{Scams and confidence tricks}}


{{DEFAULTSORT:Mismarking}}
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[[:Category:Operational risk]]
[[:Category:Valuation (finance)]]
[[Category:Crimes]]
[[Category:Deception]]

[[Category:Finance fraud]]
{{AFC submission|||ts=20201106090532|u=2604:2000:E010:1100:2126:CC46:FD47:FEF8|ns=118}}
[[Category:Fraud]]
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[[Category:Operational risk]]
[[Category:Securities (finance)]]
[[Category:Confidence tricks]]
[[Category:Valuation (finance)]]

Latest revision as of 08:51, 25 July 2024

Mismarking in securities valuation takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional fraudulent mispricing.[1][2] Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities' net asset value, or NAV), and thus misrepresents performance.[3][4] When a trader engages in mismarking, it allows him to obtain a higher bonus from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing.[3]

Mismarking is an element of operational risk.[5] The trader engaging in mismarking is sometimes referred to as a "rogue trader."[6]

During market downturns, determining the value of illiquid securities held in portfolios becomes especially challenging, in part because of the amount of debt associated with these securities and in part because of fewer mechanisms for price discovery.[2] As a result, during such periods illiquid securities are especially susceptible to fraudulent mismarking.[2]

Notable cases

[edit]

In 2007, two Credit Suisse traders pleaded guilty to mismarking their securities positions to overvalue them by $3 billion, avoid losses, and increase their year-end bonuses.[7][8][9] Federal prosecutors and the Securities and Exchange Commission charged that the traders' goal was to obtain lavish year-end bonuses that the mismarking would lead to.[10][11] The traders engaged in what The New York Times called "a brazen scheme to artificially increase the price of bonds on their books to create fictitious profits."[7] A team of traders, facing an inquiry from Credit Suisse's internal controls Price Testing group, justified their bond portfolio's inflated value by obtaining "independent" marks from other banks' trading desks.[7][12] The traders secured sham "independent" marks for illiquid securities that they held position in from friends who worked at other financial firms.[11][7][12] Their friends generated prices that valued a number of bonds at the prices that the traders requested, which the traders then recorded as the true value of the bonds.[7][12] The false profits allowed the head of the group to secure a cash bonus of more than $1.7 million and a stock award of more than $5.2 million.[7] The bank was not charged in the case.[7] Credit Suisse's outside auditor discovered the mismarkings during an audit.[13] Credit Suisse took a $2.65 billion write-down after discovering their traders' mismarking.[11]

Also in 2007, the Royal Bank of Canada, Canada's biggest bank, fired several traders in its corporate bond business, after another trader accused them of mismarking bonds the bank held by overpricing them, and marked down the values of the bonds and recognized $13 million of trading losses relating to the bonds.[14] The bank said it investigated the accusations, and took remedial action.[14] The Globe and Mail noted: "traders might have an incentive to boost [the bonds'] prices because it could have an impact on their bonuses."[14]

In 2008, a Bank of Montreal trader pleaded guilty to intentionally mismarking his trading book in order to increase his bonus from the bank.[15][16]

In 2010, a Merrill Lynch trader in London who mispriced positions he had on behalf of the bank by $100 million to cover up his losses was banned by the United Kingdom's Financial Services Authority (FSA) from working in the securities industry in the UK for at least five years.[17][18][19][20]

Also in 2010, a trader at Toronto Dominion Bank in the UK was fined £750,000 ($1.16 million) by the FSA for intentionally mismarking his trading positions.[21]

In 2016, Citigroup fired a trader for mismarking his portfolio.[22]

Also in 2016, a trader at a company authorized by the Dubai Financial Services Authority (DFSA) was banned for six years from performing any functions in connection with the provision of financial services in the Dubai International Financial Centre after he mismarked his trading book.[23]

In 2019, SEC announced settled charges against a former Citigroup Global Markets Inc. (CGMI) trader for mismarking a book of illiquid credit derivatives while sustaining losses from unauthorized trading in U.S. Treasury securities (USTs).[24]

In 2022, SEC charged James Velissaris, former Chief Investment Officer and founder of Infinity Q Capital Management, with overvaluing assets by more than $1 billion while pocketing tens of millions of dollars in fees.[25]

Regulatory action

[edit]

United States

[edit]

To address mismarking, in 2020 in the United States the Securities and Exchange Commission proposed a new rule, entitled "Good Faith Determinations of Fair Value," intended to address valuation practices and the role of a fund's board of directors with respect to the fair value of securities investments.[26][27]

See also

[edit]

References

[edit]
  1. ^ "1QIS 2 - Operational Risk Loss Data – 4 May 2001," Bank of International Settlements.
  2. ^ a b c Eugene Ingoglia; Todd Fishman, Mark Daniels (April 22, 2020). "Amid falling markets, valuation challenges and mis-marking fraud risks rise". Investigations Insight.
  3. ^ a b George J. Benston (July–August 2006). "Fair-value accounting: A cautionary tale from Enron". Journal of Accounting and Public Policy. 25 (4): 465–484. doi:10.1016/j.jaccpubpol.2006.05.003.
  4. ^ Kent Oz (2009). "Independent Fund Administrators As A Solution for Hedge Fund Fraud," Fordham Journal of Corporate & Financial Law.
  5. ^ "Liontrust Asset Management: Annual Report & Financial Statements 2020". MarketScreener. July 21, 2020.
  6. ^ Peter Nash (2017). Effective Product Control; Controlling for Trading Desks, Wiley.
  7. ^ a b c d e f g Peter Lattman and Peter Eavis (February 2, 2012). "3 Former Traders at Credit Suisse Charged With Bond Fraud". DealBook.
  8. ^ Lattman, Peter (April 12, 2013). "Former Credit Suisse Executive Pleads Guilty to Inflating the Value of Mortgage Bonds". DealBook.
  9. ^ Jacob Gaffney (February 1, 2012). "SEC charges four Credit Suisse bankers in subprime bond fraud". Housing Wire.
  10. ^ "SEC Charges Former Credit Suisse Investment Bankers in Subprime Bond Pricing Scheme During Credit Crisis". SEC.gov. February 1, 2012.
  11. ^ a b c "Former Credit Suisse traders charged with fraud; US prosecutors charged three former Credit Suisse traders with inflating the value of mortgage bonds in 2007 as the housing market deteriorated, saying they used the scheme to boost their year-end bonuses". Australian Financial Review. February 2, 2012.
  12. ^ a b c Joe McGrath (2020). "Why Do Good People Do Bad Things? A Multi-Level Analysis of Individual, Organizational, and Structural Causes of White-Collar Crime," Seattle University Law Review.
  13. ^ Andrew Hurst (February 19, 2008). "Credit Suisse reveals $2.85 billion write-downs". Reuters.
  14. ^ a b c Tara Perkins (October 26, 2007). "Trader alleges RBC undervalued bonds". The Globe and Mail.
  15. ^ Rita Trichur (November 19, 2008). "Rogue gas trader admits to fraud". The Star.
  16. ^ Tara Perkins (November 18, 2008). "Former trader pleads guilty in fraud that cost BMO $850-million". The Globe and Mail.
  17. ^ Ridley, Clara Ferreira-Marques, Kirstin (March 17, 2010). "FSA bans former Merrill Lynch trader". Reuters.{{cite web}}: CS1 maint: multiple names: authors list (link)
  18. ^ Ian King (March 16, 2010). "Merrill trader banned by FSA for mismarking". The Times.
  19. ^ Alexis Stenfors (2017). Barometer of Fear: An Insiders Account of Rogue Trading and the Greatest Banking Scandal in History. Zed Books.
  20. ^ Enrich, David (April 29, 2016). "A Disgraced Trader's Struggle for Redemption". The Wall Street Journal.
  21. ^ Muñoz, David Enrich, Cassell Bryan-Low and Sara Schaefer (September 22, 2011). "U.K. Sets Its Sights on 'Rogue' Traders". The Wall Street Journal.{{cite web}}: CS1 maint: multiple names: authors list (link)
  22. ^ Dakin Campbell (July 26, 2016). "Citi Fired Mortgage Trader in March for Mismarking Portfolio". Bloomberg.
  23. ^ "Former Dubai trader banned for $11m 'mismarking' scandal", Arabian Business, May 11, 2016.
  24. ^ "SEC Charges Former Citi Trader with Mismarking and Unauthorized Trading", SEC.gov, Sep 26, 2019.
  25. ^ "SEC Actions: Fund Investment "Mispricing" & "Mismarking" Cases 2022". www.houlihancapital.com. 4 April 2022. Retrieved 20 September 2022.
  26. ^ "Good Faith Determinations of Fair Value; Proposed Rule," SEC 17 CFR Parts 210 and 270, Release No. IC-33845; File No. S7-07-20, April 21, 2020.
  27. ^ Terrence O. Davis (May 28, 2020). "SEC Issues Fair Value Proposal". The National Law Review.
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