FINRA has permanently barred a former Deutsche Bank broker from the securities industry for manipulating the price of a stock in an effort to enrich an unnamed hedge fund client, himself and his family.
FINRA found that Edward Brokaw, who worked in the Greenwich, Conn., branch office of Deutsche Bank Securities, engaged in a pattern of trading designed deliberately to drive the value of Monogram Biosciences (MGRM) stock down and, in turn, drive up the value of contingent value rights (CVRs) on that stock. Included in the evidence against Brokaw were tape recordings of his phone calls to his firm's trading desk to place sell orders.
The MGRM CVRs were created and issued in December 2004, in connection with the merger of two firms to form MGRM. The CVRs were to be valued during a 15-day pricing period scheduled for 18 months after the merger. At the end of the pricing period, CVR holders were to receive a payment from MGRM, most or all of which would be in cash. If the final VWAP was at or above $2.90, the CVRs would be worthless. But if the final VWAP was below $2.90, CVR holders would receive a penny-for-penny payment for the amount below $2.90, down to $2.02. The maximum of $0.88 per CVR would be paid if the final MGRM VWAP was at or below $2.02.
Brokaw's hedge fund client held approximately 18.5 million CVRs—nearly 30% of the 64.8 million MGRM CVRs outstanding. For every penny the final VWAP dropped below $2.90, the value of the hedge fund's CVRs increased by $185,000. If the maximum payout of $0.88 per CVR were achieved, the hedge fund would receive approximately $16 million. Brokaw and his family owned 217,000 of the CVRs, with a potential maximum payout of $188,000.
The FIRNA hearing panel decision notes that the hedge fund owned 3 million shares of MGRM and told Brokaw that it wanted to sell off all of those shares during the pricing period. Prior to market open on the first day of the pricing period, the hedge fund placed an order with Brokaw to sell 50,000 MGRM shares close to the open and another 50,000 shares close to the close. In a tape-recorded phone call that morning, Brokaw told a Deutsche Bank sales trader, "Take 50,000 MGRM at the market. Sell it down. Sell it as low as you want. Sell it hard, 50,000." According to FINRA, the sales lasted little more than a minute and MGRM shares dropped from $2.06 to $1.94.