The UK Financial Services Authority (FSA) announced on May 26 that it had banned and fined trader Nilesh Shroff for deliberately disadvantaging his customers on seven occasions between June and October 2007 by partially “pre-hedging” program trades without the clients’ consent. Mr. Shroff has been prohibited from performing any regulated function on the grounds that he is not fit and proper and has been fined £140,000 (approximately $223,500).
“Pre-hedging” refers to trading by a broker for his firm’s benefit in advance of carrying out a trade for his customer, using information provided by that customer. When customers instructed Mr. Shroff to buy particular stocks, he bought those stocks for the firm first, causing the price to increase before he executed the customers’ trades. When the customer order was to sell, he first sold on behalf of the firm, decreasing the price. Mr. Shroff knew such unauthorized pre-hedging was expressly prohibited by the FSA and Morgan Stanley’s policies and not in his clients' interests.
The misconduct occurred while Mr. Shroff was a senior trader at Morgan Stanley. Following its own investigation, Morgan Stanley dismissed him for gross misconduct on December 28, 2007. The FSA determined that he was solely responsible in this case and neither Morgan Stanley nor companies related to it, nor any other individuals employed by it, were subject to criticism.
Mr. Shroff agreed to settle at an early stage of the investigation and therefore qualified for a 30% reduction in penalty from £200,000 (approximately $320,000). In a published comment, Margaret Cole, the FSA's director of enforcement, said, “Nilesh Shroff has been banned from trading because he repeatedly abused his position of responsibility as a senior trader and the trust placed in him by clients and by his employer. He was aware of FSA guidance and Morgan Stanley’s rules in relation to pre-hedging but nonetheless he broke them.”
