SEC Meter Maid Nabs 2 For Bad Parking

On February 4 the SEC charged two Wall Street traders involved in a fraudulent parking scheme, which involves temporarily placing (or parking) securities in a separate account to avoid detection.

The accused, Thomas Gonnella and Ryan King, worked at different (unnamed) firms. Gonnella organized the trade to hide securities from his firm's books. In doing so, he was skirting "aged-inventory" policies that would have negatively impacted his bonus calculations.

Gonnella planned to repurchase the securities at a profit for King's firm. This was not the first time the duo had made parking arrangements.

Their downfall came from the due diligence of the compliance officer at Gonnella’s firm who noticed a $174,000 loss. According to the SEC, "The SEC’s Enforcement Division alleges that after Gonnella’s supervisor began inquiring about the trades, Gonnella and King took steps to evade detection by interposing an interdealer broker in subsequent transactions and communicating by cell phone to avoid having conversations recorded by their firms. Gonnella and King were eventually fired by their firms for the misconduct."

The SEC's transcript of their instant messages and texts is rather entertaining:

May 31, 2011
Gonnella: “i have 4 small bonds that i’m looking to turnover today for good ol’ month end/aging purposes ... i like these bonds ... and would more than likely have a higher bid for these later this wk when the calendar turns ...”
August 29, 2011
Gonnella: “let’s talk tmrw. Have some aged bonds that I might offer you, if you’re game ... maybe do what we did a few months ago w/ some of those bayc’s ...”
Some months later:
Gonnella: “Check your text [messages] in like 3 minutes.”
King: “haha, ok ... sneaky sneaky.”

Let us take a look at the bigger picture. For months the parking schemes between Gonnella and King were successful and undetected.

[For more info on how financial firms need better technology to detect fraud when mobile devices are involved, read: Traders Demand Mobility: BYOD And 2014 Other Trends.]

According to Walter Ferstand, the capital markets compliance expert at Nice Actimize, many do not appreciate that parking schemes are pretty common, and very difficult to detect without automated tools.

Ferstand explains the manual process to flag parking schemes produce reports nearly five thousand pages long. A small compliance team or sole compliance officer could only spot check that information. But when the SEC or FINRA comes knocking the officer can at least show the report as evidence of the required efforts. They've checked the box, so to speak. He estimates a conservative 70 percent of firms still manually monitor for parking trades.

Impact

Let's face it, parking schemes only impacts the two parties involved and not the greater market. From a regulatory perspective it is far down the list of surveillance priorities. A lot of it is endemic to the securities industry, but it is still wrong.

Tier 1 and most of Tier 2 trading firms almost all have automated surveillance systems, suggesting this textbook violation would have been caught in nearly real-time. From a regulator's perspective, because Tier 1 and 2 contribute the great majority of total market volume, much of the flow is systematically reviewed.

Still, the majority of firms - smaller firms - still do not have the automated controls that would have detected this activity. This is no excuse. The supervisor needs to monitor trade flow, and even without proper tools FINRA has a right to put that failure to supervise on the record.

From a compliance officer standpoint, failure to detect could mean being barred from industry for a month, years or even life.

"This is reputational loss," says Nice Actimize managing director Justin Amos. "It's not just the amount of money, it's association… People treat it rather lightly and they really shouldn't. Surveillance should be done systematically. Nobody asks down the road why you got a failure to supervise, it's just there."

In the case of Gonnella and King, King was barred from the securities industry and facing additional penalties. He further agreed to pay disgorgement of $22,606.80 and prejudgment interest of $1,503.66. Meanwhile, "the Enforcement Division’s litigation against Gonnella continues in a proceeding before an administrative law judge," according to the SEC. Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio