In mid 2008 we commented on the London branch of the Toronto Dominion bank in London, where a "senior male trader" had "incorrectly priced credit derivatives" resulting in a loss of nearly $100 million. At the time, we emphasized the lesson that this mispricing was not the work of a junior, green employee, but the senior head of a bank's trading desk.
The wheels of justice can move slowly, but an industry friend (to whom we express our thanks) forwarded some updated information. The FSA have just published a final notice on the case:
This notice is issued to Nabeel Naqui as a result of his conduct during the period July 2006 to June 2008 (the "Relevant Period"), during which he was employed by Toronto Dominion as Head of the Credit Products Group (“CPG”), Europe and Asia Pacific desk. During this period, Mr Naqui deliberately:
(1) mismarked his trading book; and
(2) subverted the independent process by which Toronto Dominion checked the valuation of its trading positions at the end of each month. Mr Naqui altered prices he had obtained from independent dealers to correspond to the prices at which he had marked positions in his book. Mr Naqui then provided these altered price runs to those responsible for conducting the independent valuation process, knowing that they would be used as the basis of their valuation.
As our industry friend noted, the first question is obvious: exactly how can pricing runs provided by the trader be helpful for those "conducting the independent valuation process"?
The FSA, helpfully, gives some more information:
"The CPG [Credit Products Group] Europe and Asia Pacific desk was run from London and headed by Nabeel Naqui, a Managing Director. As well as being Head of Desk and responsible for other traders, Mr Naqui was also responsible for trading credit default index and tranche products (“the Products”)....
All CPG trading positions were subject to a month end Independent Price Verification (“IPV”) process in Toronto Dominion during the Relevant Period. The IPV process required the Global Middle Office (“GMO”) to revalue all positions held by the firm’s traders at month end on the basis of independently sourced market price information. The objective of the IPV process was to reveal any error or bias in pricing so that this could be corrected and inaccurate marks eliminated.
OK, fair enough. But let's learn a little more about the "revaluation" conducted based on "independently sourced market price information":
Mr Naqui was aware that in order to conduct the IPV, GMO used series of market price quotes, known as runs, which he provided to them every month, rather than sourcing these independently from dealers. Mr Naqui was regularly asked by GMO to provide particular runs for use in the IPV process. Mr Naqui obtained runs in electronic messages from independent dealers, and then forwarded them to the relevant individual within GMO.
Yep - the trader was the one who gave the back office the "independent" broker runs. And guess what happened next...
Before Mr Naqui sent the runs on to GMO, however, he altered particular prices within the runs to correspond to the prices at which he had mismarked his front office positions. He did not alter all prices in which he held positions on his trading book. Mr Naqui did not mark or highlight the altered figures, or provide any indication within the message that some of the figures it contained were not figures supplied by the independent dealer. As a result of this method of circumvention Mr Naqui’s mismarking remained undetected for a period of approximately two years, until after he was informed that Toronto Dominion proposed to make him redundant.
Well, predictable stuff so far (and sound like any administrators we know?) We do, however, like Mr. Naqui's response:
Mr Naqui asserted that he had amended the quotes for a number of valid reasons. Mr Naqui claimed that one of the principal reasons why he had been obliged to amend the forwarded quotes was so that he was able to negate the impact of what he characterised as systems issues. Mr Naqui explained that there were flaws within the systems used by Toronto Dominion and that these resulted in inaccurate valuations. Mr Naqui relied on evidence which tended to show that he had raised these issues with others within the bank; however Mr Naqui complained that he had not received a satisfactory response to the document he had drafted. Mr Naqui claimed that thereafter he had only ever escalated his concerns about the systems difficulties during the course of face to face meetings with his immediate superior. Mr Naqui accepted that there was no record of any of these attempts to complain about the systems issues, though he did complain that his immediate superior was not a credible witness. Therefore and notwithstanding his reservations about the systems Mr Naqui had been obliged to forward quotes to GMO and thus he had decided to amend certain quotes.
The conclusion of the FSA:
It is clear from the foregoing that the FSA finds that ‘systems issues’ do not excuse or explain Mr Naqui’s conduct. The FSA does not accept the criticisms made by Mr Naqui of both the reports produced for Toronto Dominion. In particular the FSA finds that the recent expert report rebuts Mr Naqui’s contention that he was obliged to amend particular quotes to negate the effects of systemic problems. The FSA finds that Mr Naqui selectively amended quotes only where it was necessary to disguise losses in his book. The FSA finds that were Mr Naqui to have been seeking to cater for systemic issues then it would have been more appropriate for Mr Naqui to have amended all of the quotes that he forwarded to GMO. The FSA finds that whilst there may have been some problems within the systems these did not excuse his decision to amend quotes and nor did they explain the extent of the losses created by his mismarking. The FSA also rejects Mr Naqui’s claim that, having attempted to highlight the systems issues to senior management through a paper on the topic, he then only ever escalated this to his immediate superior in the course of face to face discussions.
One of favorite maxims is this: we have yet to meet a trader who is not supremely confident that his marks are correct, especially when he or she knows that they are wrong...
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