Econintersect: Some of the hidden books in banking may be run by the banks and some may be run by employees hiding from the bank. Matthew M. Taylor pled guilty yesterday (Wednesday, 03 April 2013) of hiding from his employer Goldman Sachs (NYSE:GS) $8.3 billion in unauthorized futures trades. The activity took place in 2007.
Taylor told the court that the trades exceeded by about ten times the size of the trades he was authorized to enter. After poor trading performance earlier in 2007 Taylor was told by the bank to reduce his positions. Instead he surreptitiously greatly increased his trades in an apparent effort to reestablish his credibility. He then created fictitious trades on the books to obscure the actual positions he had established. The deception was uncovered when the trades went against Taylor.
Taylor was fired by Goldman in December 2007. He then worked for Morgan Stanley (NYSE:MS) and stayed there until the summer of 2012.
The prosecution asked for a prison sentence of 33 months to 41 months and a fine of $7,500 to $75,000. However, it is not clear whether a heavier sentence might be handed down. According to Reuters:
During the hearing, [U.S. District Court Judge William] Pauley questioned how the government came up with its proposed sentence, given the size of Goldman's loss. Steve Lee, a prosecutor, said it was based on Taylor's compensation.
Pauley stressed the "court may not be bound by that calculation" come sentencing, adding that he was "puzzled" by the deal.
"He cooked Goldman's books, and that's not sophisticated?" Pauley asked.
A person familiar with Goldman's equities trading business said Taylor's trading position was significant - representing roughly 20 percent of e-mini trading volume the day it was established. The market moved against Taylor's position, leading to the loss, said the person, who declined to be named.
The size of the trade put on by Taylor was more than double the $4.1 billion trade associated with the causes of the May 6, 2010, "flash crash". In that case the DJIA (Dow Jones Industrial Average) dropped more than 700 points in just a few minutes as the market became unstable.
In an unrelated story that broke the same day, the Bundesbank opened an investigation into reports that Deutsche Bank cooked its books to conceal billions of dollars in losses during the financial crisis in 2007-2009. According to the Financial Times it is alleged that the bank mispriced derivatives in order to hide between $4 billion and $12 billion in losses at a time when solvency of TBTF (too big to fail) banks was at risk. The SEC (Securities and Exchange Commission) has also been investigating.
In the Deutsche Bank case whistle blower employees have claimed that senior executives had full knowledge of the scheme, which involved recording gains on derivatives portfolio and neglecting to record losses.
The Financial Times says that Deutsche Bank denies the charges and claims that the allegations are more than 2 1/2 years old and have been thoroughly investigated by a law firm. From the Financial Times:
[Deutsche Bank said] the allegations . . . had been the “subject of a careful and thorough” investigation by a law firm, which found them “wholly unfounded”.
“Moreover, the investigation revealed that these allegations stem from people without responsibility for, or personal knowledge of, key facts and information,” Deutsche said. “We have and will continue to co-operate fully with our regulators on this matter.”
The Financial Times reports that two of the complainants are Eric Ben-Artzi, a risk manager, and Matthew Simpson, a senior trader.
- Ex-Goldman trader Taylor pleads guilty to wire fraud (Lauren Tara LaCapra and Nate Raymond, Reuters, 03 April 2013)
- Bundesbank launches Deutsche probe (Tom Braithwaite, Kara Scannell and Chris Bryant, Financial Times, 03 April 2013)