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FSA bans former Morgan Stanley trader for pre-hedging

27 May 2009  |  1611 views  |  0 Source: Financial Services Authority

The Financial Services Authority (FSA) has banned and fined trader Nilesh Shroff for deliberately disadvantaging his customers by 'pre-hedging' trades without their consent.

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.

While Shroff was a senior trader at Morgan Stanley, the FSA found that he disadvantaged his clients on seven occasions between June and October 2007 by partially 'pre-hedging' programme trades without the clients' consent.

'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. Where customers instructed Shroff to buy particular stocks, he bought those stocks for the firm first, causing the price to increase before he executed the customers' trades. Where the customer order was to sell he first sold on behalf of the firm, decreasing the price. Shroff knew such unauthorised pre-hedging was expressly prohibited by the FSA and Morgan Stanley's policies and not in his clients' interests.

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.

"As an experienced trader, he would also have known that his orders were likely to disadvantage his clients. The FSA will take action against those who act without honesty and integrity and who do not follow our rules."

Shroff agreed to settle at an early stage of the investigation and therefore qualified for a reduction in penalty. Were it not for this discount, the FSA would have imposed a financial penalty of £200,000. Following its own investigation, Morgan Stanley dismissed Shroff for gross misconduct on 28 December 2007.

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