Wednesday, November 7, 2012

Billion Dollar "Unauthorized Trade" Suggests Criminal Statute Prohibiting "Reckless Trading"

by: Lawrence S. Goldman 

As the New York Times reports (see here), once again a trader has apparently taken an enormous bet with his employer's money and lost, thereby costing his employer, a small Connecticut brokerage firm, millions of dollars and threatening its continued existence.  David Miller, described by the Times as a "journeyman" with a career that includes stints at some of Wall Street's less distinguished firms, bought roughly $1 billion of Apple stock hours before Apple was to announce its earnings for his employer Rochdale Securities in what the firm's president called an "unauthorized trade."  When the announced earnings were below expectations, Apple's stock price fell and the firm was then forced to sell the securities at a considerable loss.

I have no idea whether Miller's trading was a calculated effort of his own to secure a huge gain for his employer and perhaps a corresponding large bonus for himself, an execution of a strategy approved by supervisors, a ministerial error resulting from a "fat finger" (as Rochdale has reportedly told potential financial rescuers) or something else.   However, this situation, along with better-known recent examples of purportedly unauthorized trades which have caused massive losses (some of which, potentially at least, might eventually be borne by taxpayers) lead me to wonder whether there should be a criminal statute prohibiting "reckless" trading of other people's money.  Many statutes, generally state, prohibit reckless behavior which causes, or just puts people at risk of, death or physical harm, including in New York reckless assault, reckless endangerment, and reckless driving.  I wonder whether just as the law criminalizes reckless conduct which may cause physical harm, it should criminalize reckless conduct which may cause monetary harm.  Such a statute might criminalize conduct when one "takes a substantial and unjustifiable risk in making trades with money other than his own and that such risk is a gross deviation from the standard of conduct a reasonable person would observe in that position."  (Cf. N.Y. Penal Law Section 15.05).

The bonus system which gives great incentives to hugely successful trading by one whose own funds are not put at risk (at least directly) and lesser disincentives to hugely unsuccessful trading encourages taking long-shots.  Perhaps that is the way the markets should work.  However, contrary to my visceral feeling that governments enact too many penal statutes, I believe a prohibition of reckless trading which results in severe financial loss might be worthy of consideration.


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NO LARRY, SAY IT'S NOT SO!!!. Investing is all about taking risks. It is by its very nature reckless. You don't want juryies having to draw lines here. If regulators had done their jobs in the first place, if management has followed its own internal procedures, if people didn't have to learn and relearn and learn again the maxim, "if it sounds too good to be true, it is false, don't believe it, run the other way," most of the losses people suffered would not have occurred. All your suggestion would do is put a few very guilty people in jail along with a few innocent idiots, but it would not save people from their own greed.

Posted by: Jon May | Nov 9, 2012 9:41:04 AM

Although I cannot claim that I am dismayed by the remarks of my eminent colleague Jon May (pun intended), I do not find them at all compelling.

Poor internal oversight by management and bad judgment by consumers are not defenses to fraud, nor should they constitute reasons to ignore serious wrongdoing. Unfortunately, I have recently seen too many instances where one or a few traders have seemingly deliberately violated company policies and figuratively played the lottery with other people's money and thereby caused immense losses to institutions, shareholders and investors, and potentially the treasury -- through governmental insurance, loss of tax revenue, or at worse bailouts.

I am somewhat intrigued by, but far from wedded to, the statute I suggested for consideration. I suspect that there are strong, cogent and perhaps convincing arguments against a statute I am asking be considered -- one which criminalizes deliberate trading of others' money (1) in violation of internal rules, (2) with extreme recklessness, and (3) resulting in considerable loss -- but I do not believe this is one of them.

Posted by: Lawrence S. Goldman | Nov 13, 2012 9:38:17 AM


This should really be the subject for an article addressing the pros and cons of a reckless standard in statutes criminalizing investment practices. There are going to be the easy, I know it when I see it, cases where the conduct is so outrageous that everyone agrees the broker should be drawn and quartered and then there are going to be much harder cases where a lot of people lost a lot of money in a situation where in hindsight everyone agrees that the broker used very bad judgment. Because those accused of white collar crimes are often destroyed by the mere act of being indicted, I am very concerned with allowing a 28 year old AUSA with the USAO SDNY exercising prosecutorial discretion in these kinds of cases.

I am glad that you were not "dismayed" by my critique; I am always honored when someone of your stature even bothers to dignify something I have said.


Posted by: Jon May | Nov 17, 2012 11:52:30 AM

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