Guggenheim Securities Fined $800,000 by FINRA for Failing to Supervise CDO Traders

The Financial Industry Regulatory Authority (FINRA) has announced an $800,000 fine to Guggenheim Securities for “failing to supervise two collateralized debt obligation (CDO) traders who engaged in activities to hide a trading loss”. Furthermore, FINRA has sanctioned the former head of Guggenheim’s Collectirized debt obligation (CDO) desk, Alexander Rekeda, by giving him a one year suspension from associating with anyone in the industry plus a $50,000 fine. Also, one of the traders on Guggenheim’s CDO desk, Timothy Day, was suspended for four months and fined $20,000.

Guggenheim’s CDO desk allegedly acquired a €5,000,000 junk-rated tranche of a collateralized loan obligation in October 2008. They allegedly tried to sell their position, but were unable to do so. In the process they were able to convince one of their hedge fund customers to purchase the CLO for $950,000 more than it had previously agreed to pay by falsely claiming that the CLO was “part of a package of securities a third party offered for sale.” according to FINRA. The traders allegedly continued to offload the CLOs by providing customers with order tickets which allegedly increased the price they were paying for the CLO while simultaneously decreasing prices of other positions which were part of the transaction. Customers begun to notice and begun questioning the increased in price, to which Day, at Rakeda’s direction, told them that “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 customers believed in the explanation which they were given and thus agreed to pay the extra amount for the CLO, but Day and Rekeda would in return compensate them in other transactions. These included pricing adjustments, a waiver of fees the customer owed, and cash payment to the customer. The subsequently created records allegedly had no mention of their connection to the overpayment for the CLO.

According to FINRA, the fines are a result of “Guggenheim’s inadequate supervision allowed their traders to engage in extensive and repeated inappropriate actions to try to conceal a trading loss. The traders deceived their customer and supported their scheme through the use of inaccurate books and records, all of which went undetected by the firm.”

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