SEC fines, bans former Goldman Sachs head RMBS trader for fraud

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The former head trader of residential mortgage-backed securities for Goldman Sachs repeatedly lied to the firm’s clients and overcharged mortgage bond buyers, generating millions of dollars in extra revenue for both Goldman Sachs and himself in the process, the Securities and Exchange Commission stated Tuesday.

According to the SEC, Edwin Chin, who served as Goldman Sachs’ head RMBS trader from 2010 through 2012, agreed to settle charges brought by the SEC that he lied to clients about the prices of RMBS deals, frequently misrepresenting not only the prices that Goldman Sachs paid for the mortgage bonds, but whether the bonds were sold out of Goldman Sachs’ inventory or not.

As part of the settlement, Chin will pay a fine of $400,000 and is barred from working in the securities industry for at least two years, the SEC said.

According to a statement from Goldman Sachs, the firm fired Chin in 2012 after the allegations of his misconduct first surfaced.

“We terminated Mr. Chin in 2012 for reasons detailed in his FINRA records,” Goldman Sachs said in a statement.

A review of Chin’s records with FINRA, the Financial Industry Regulatory Authority, shows that Chin is not currently licensed and was “discharged” from Goldman Sachs on Dec. 28, 2012.

“Employee discharged from the firm after allegations were made that: after discussion and agreement with his manager, employee sold certain securities,” Chin’s FINRA record states. “Over the next 16 days after the first sale, employee repurchased some of those securities through another party without advising the manager.”

The SEC’s settlement order provides much more detail about Chin’s misconduct.

According to the SEC, by late 2011, Chin was the most active RMBS trader at Goldman, focusing mostly on non-agency mortgage bonds.

In Goldman’s role as an intermediary, Chin negotiated a price for a mortgage bond trade, and had a fiduciary duty to be honest to both the buyer and the seller about the terms of the negotiation.

But according to the SEC, Chin misled Goldman’s clients about the price at which Goldman bought the mortgage bond and the amount of Goldman’s compensation for arranging the trades, thereby generating extra, unearned revenue for Goldman.

In certain circumstances, the SEC said, Chin also misrepresented that he was arranging a RMBS trade between customers, when Chin was actually selling the RMBS out of Goldman’s own inventory, which allowed Chin to generate profits for Goldman by purchasing the RMBS from one customer and selling it to another customer at a higher price, all while telling the client that the sale was actually a trade instead of a sale from Goldman’s inventory.

“With no public exchange showing the price for each RMBS trade as it occurs, investors purchasing these securities rely on dealers to be honest about the purchase price they paid,” said Michael Osnato, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit. “Chin repeatedly abused his fundamental duty to serve as an honest transmitter of market information so he could increase Goldman’s trading profits and, indirectly, his own compensation.” 

The SEC settlement agreement lists several examples of Chin’s misconduct, including lying to a customer about the fact that Goldman owned a particular mortgage bond, claiming that Goldman was selling the bond at cost, rather than at an inflated price.

According to the SEC, that trade generated $200,000 in extra profit for Goldman.

In another case, Chin lied about being in active negotiations about a mortgage bond trade. Chin told the buyer that he was negotiating with the seller, when in reality, the sale had closed five minutes earlier.

According to the SEC, Chin again overcharged the buyer, generating $100,000 in extra profit for Goldman.

In another case, Chin again feigned active negotiations with a mortgage bond seller, misrepresenting the nature of the trade and price to a buyer.

In this case, Goldman had actually owned the mortgage bond in question for three hours, despite Chin’s claims that the trade was still in active, and tough, negotiations.

Eventually, the buyer agreed to buy the mortgage bond at an inflated price, with Goldman getting nearly three full percentage points in commission on the trade, rather than the six ticks (one tick equals 1/32 of a percentage point) the customer believed it was paying.

That trade generated $825,000 in extra revenue for Goldman Sachs, according to the SEC.

In just the five trades that the SEC notes in the settlement order, Chin generated more than $1.5 million in extra revenue for Goldman Sachs via his misconduct.

According to the SEC, Chin is barred from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization; and prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter for a period of at least two years.

Additionally, Chin, who did not admit to or deny the findings of the SEC investigation, will pay $200,000 in disgorgement, $50,000 in prejudgment interest, and a civil penalty of $150,000.

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