Updated from 3:24 p.m. EST
Scudder Kemper Investments
, the prominent New York-based money management firm, was censured and fined a quarter of a million dollars Wednesday by the
Securities and Exchange Commission
in connection with unauthorized derivatives trading that resulted in losses to investors of more than $16 million.
The SEC also sanctioned two former employees, Gary Paul Johnson, 50, and Michael T. Sullivan III, 37. Johnson, the former head of derivatives trading at Scudder's Boston office, agreed to a one-year suspension and a $10,000 fine. Sullivan, formerly a trader under Johnson's supervision, agreed to be barred from the industry for five years.
Scudder agreed to the censure and fine without admitting or denying the charges, the agency said. Scudder would not comment on whether Johnson and Sullivan left because of the unauthorized trading, but a statement put out by the company acknowledged that Sullivan "left the firm in October 1998 when his activities were discovered by Scudder Kemper." Johnson left the firm in Jan. 1999.
The largest loss by far, $12.9 million, occurred in the
Scudder Short-Term Bond Fund. Sullivan executed 1,100 derivatives trades for that account, and "most were forged, misquoted or not even filled out," said an SEC representative in an interview. Scudder would not disclose the other affected accounts, though the SEC said the remaining losses were split between registered investment companies and institutional clients.
As of Dec. 21, the fund had about $800 million in assets, down drastically from its holdings of $1.17 billion on Jan. 1, 1998. Upon discovering the losses the week of Oct. 12, 1998, according to a
report, Scudder said it immediately made whole all the affected funds by infusing money back into them. Additionally, Scudder said no shareholders were affected.
According to the SEC, Scudder discovered in early October 1998 that Sullivan, under Johnson's supervision, severely abused a new derivatives trading strategy implemented by Scudder in September 1996. That strategy took advantage of short-term movements in the U.S. Treasury futures market and imposed various basis-point loss limits, duration limits and limits on losses that could be incurred on individual transactions. Sullivan was the only trader with responsibility to use the new strategy, the SEC said.
Sullivan was given discretion to execute derivatives trades for 20 of Scudder's investment advisory accounts. For more than a year, from July 1997 through October 1998, Sullivan repeatedly went beyond the imposed limits in executing over 100 unauthorized transactions in 12 accounts, including eight registered investment companies, the SEC said.
To avoid detection, he miscoded order tickets, forged the signatures of fund managers on the tickets and sometimes did not submit any order tickets at all. Sullivan's supervisor, Johnson, "failed to reasonably supervise Sullivan," according to the SEC. Further, Scudder was found to lack the appropriate controls and procedures to avoid such incidents, the SEC said.
In response to the losses, Scudder also reviewed and enhanced its compliance procedures. "We added an additional level of supervisory review and enhancements to our reporting systems," said Eleanor Mascheroni, a spokesperson for Scudder, in an interview.