Thomas C. Gonnella, a proprietary trader at Barclays, found out the hard way that appeals from an Administrative Law Judge initial decision can be a risky proposition.
The SEC charged Gonnella with engaging in sham transactions in aged, illiquid asset-backed securities with another trader. The Administrative Law Judge found for the SEC, and suspended Gonnella from the securities industry and from participation in penny stock offerings for 12 months. The ALJ also imposed a cease-and desist order and a civil money penalty of $82,500.
After a joint appeal by the Enforcement Division and Gonnella, the full Commission upheld the cease-and-desist order and the monetary penalty. The Commission also went beyond the ALJ’s suspension order, and barred Gonnella from the securities industry and from participation in penny stock offerings with a right to reapply in five years.
Over six months in 2011, Gonnella made 12 different sales and repurchases with another trader. He sold aged, illiquid ABSs and then repurchased the same instruments from the counterparty within a few days at an increased price.
He arranged these transactions to create a false appearance of compliance with Barclays’ policy that ABS should not be held for long periods of time, and to circumvent the firm's rule that imposed nonrefundable charges on traders' trading book profits when ABS were held for longer than seven months.
The SEC found that Gonnella acted willfully, and that his misconduct was egregious. In rejecting the respondent’s claim that the deals were inconsequential, the Commission stated that the scheme exposed Barclays to the risk of holding securities that were overvalued or undervalued. This pattern of conduct "undermined a crucial risk management tool necessary to mitigate potential losses associated with proprietary trading."
The nature and extent of the misconduct supported "significant remedial action" against Gonnella. He knowingly committed fraud, observed the SEC, and deceived Barclays about his compliance with a policy intended to reduce risk. The Commission also observed that he failed to recognize the wrongful nature of his actions, characterizing the scheme as, at most, an "ordinary and mundane workplace peccadillo."
Gonnella’s "cavalier attitude" also indicated a significant risk of the likelihood of future misconduct. The SEC rejected the argument that Gonnella had "suffered enough" with the loss of his job, his reputation and his compensation, noting that "we have repeatedly stated that the collateral consequences of misconduct, including the loss of employment, reputation, and income, are not mitigating."
Commissioner Michael S. Piwowar agreed with the majority on the imposition of the cease-and-desist order and the money penalty. However, he objected to the industry bar of at least five years. Commissioner Piwowar stated that he had "serious concerns, on due process and other grounds, about the Commission imposing sanctions that are neither requested by the Division nor found by the administrative law judge to be appropriate." He found no compelling reason for the Commission to go beyond the Enforcement Division’s request and impose a permanent bar.
This is the second time in a week that respondents have received harsher penalties from the full commission after appealing an ALJ ruling. Two KPMG executives suffered a similar fate last Friday.
Read more about this case here.
See this story for more on the KPMG ruling.
In the Matter of the Application of Thomas C. Gonnella, SEC Release No. 33-10119 (Aug. 10, 2016).
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