The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Guggenheim Securities, LLC of New York $800,000 for failing to supervise two collateralized debt obligation (CDO) traders who engaged in activities to hide a trading loss.

In October 2008, as the result of a failed trade, Guggenheim’s CDO Desk acquired a €5,000,000 junk-rated tranche of a collateralized loan obligation (CLO). After unsuccessful attempts by Guggenheim’s CDO Desk to sell the position, representatives of the firm persuaded a hedge fund customer to purchase the CLO for $950,000 more than it had previously agreed to pay by falsely presenting the CLO as part of a package of securities a third party offered for sale. FINRA found that in an attempt to hide the trading loss on the CLO position, the traders provided the customer with order tickets that increased the price for the CLO position and decreased the price of the other positions that were part of the transaction. When the customer inquired about the pricing adjustments, agents of the firm lied and said a third-party seller of the CLO position had already settled the trade at a higher price and requested the customer pay this higher price. The customer agreed to overpay for the CLO and in return, agents of the firm agreed to compensate the customer through other transactions, including pricing adjustments on six other CLO trades, a waiver of fees the customer owed in connection with resecuritization transactions, and a cash payment to the customer. The records created to document the transactions did not indicate any connection to the overpayment for the CLO.

FINRA found Guggenheim failed to conduct adequate review of the CDO Desk’s trades, documentation concerning transactions by traders on the desk, and the traders’ email communications.

In concluding the settlement, Guggenheim Securities neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. As part of the settlement, Guggenheim must retain an independent consultant to review and make recommendations concerning the adequacy of its supervisory procedures.

The foregoing information, which is publicly available on FINRA’s website, is being provided by The White Law Group.  The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.  For more information on The White Law Group visit https://whitesecuritieslaw.com.