Barclays Capital will fork over more than $16.5 million as part of a settlement stemming from allegations that the company did not properly supervise two of its former mortgage bond traders who allegedly lied to and overcharged clients, the Securities and Exchange Commission announced this week.
According to the SEC, an investigation found that Yoon Seok Lee and David Wong, two former Barclays Capital residential mortgage-backed securities traders, “made false or misleading statements to Barclays RMBS customers, including false or misleading about the price at which Barclays had bought the securities; the amount of profit Barclays was making for facilitating the trades; and who owned the securities, including creating a fictional third-party to create the appearance of price negotiations.”
Additionally, the SEC investigation found that Lee and Wong added excessive mark-ups on certain transactions without notifying their customers.
Specifically, the SEC claims that:
In trading non-agency RMBS, Barclays purchased the securities for its own account and then sold them from its own account to its customers. Barclays did not charge a commission on the trades. In many instances, the purchase and sale took place within minutes or hours and involved little or no risk to Barclays. The false or misleading statements led customers to accept less, or pay more, for securities than they otherwise might have accepted or paid.
The SEC investigation also found that Barclays “failed reasonably to supervise” Lee and Wong by not implementing appropriate supervisory procedures that could have prevented and/or detected the false or misleading statements Lee and Wong made to customers and whether they were overcharging customers.
According to the SEC, its investigation found that:
Barclays had the means to monitor communications for false or misleading statements but failed to identify this misconduct. In addition, Barclays failed reasonably to detect and review whether its mark-ups for certain non-agency RMBS transactions were reasonable. Barclays maintained a compliance system during the Relevant Period that was designed to detect transactions with markups above a certain threshold for further review, but that system was defective. As a result, Barclays did not detect and review excessive mark-ups on the intra-day trades in non-agency RMBS.
All in all, Lee and Wong’s misconduct, which took place between June 2009 and December 2012, resulted in approximately $15.5 million in excess profits to Barclays, the SEC said.
As a result of the investigation, Barclays will repay the full $15.5 million ($15,561,711 to be exact) to the affected customers. Barclays, which did not admit to or deny the SEC’s findings, will also pay a penalty of $1 million.
Barclays also agreed to implement procedures to prevent and detect the types of misconduct Lee and Wong were accused of perpetrating.
Lee and Wong also neither admitted to nor denied the SEC’s findings, but both agreed to 12-month suspensions from working in the securities industry. Each former trader will also pay a fine. According to the SEC, Lee will pay a fine of $200,000, while Wong will pay $100,000.
The SEC noted that it considered Barclays’ “significant cooperation” with its investigation when determining the course of its sanctions. According to the SEC, Barclays prepared detailed trade communication information “essential to understanding the transactions and identifying false or misleading statements,” along with other actions that aided in the SEC’s investigation.
When reached by HousingWire, a spokesperson for Barclays said the company will not be commenting on the SEC’s actions.
