Product Code Database
Mismarking in securities valuation takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional fraudulent mispricing. "1QIS 2 - Operational Risk Loss Data – 4 May 2001," Bank of International Settlements. Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities' net asset value, or NAV), and thus misrepresents performance.Kent Oz (2009). "Independent Fund Administrators As A Solution for Hedge Fund Fraud," Fordham Journal of Corporate & Financial Law. When a trader engages in mismarking, it allows him to obtain a higher Bonus payment from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing.
Mismarking is an element of operational risk. The trader engaging in mismarking is sometimes referred to as a "rogue trader."Peter Nash (2017). Effective Product Control; Controlling for Trading Desks, Wiley.
During market downturns, determining the value of illiquid securities held in portfolios becomes especially challenging, in part because of the amount of debt associated with these securities and in part because of fewer mechanisms for price discovery. As a result, during such periods illiquid securities are especially susceptible to fraudulent mismarking.
Also in 2007, the Royal Bank of Canada, Canada's biggest bank, fired several traders in its corporate bond business, after another trader accused them of mismarking bonds the bank held by overpricing them, and marked down the values of the bonds and recognized $13 million of trading losses relating to the bonds. The bank said it investigated the accusations, and took remedial action. The Globe and Mail noted: "traders might have an incentive to boost the prices because it could have an impact on their bonuses."
In 2008, a Bank of Montreal trader pleaded guilty to intentionally mismarking his trading book in order to increase his bonus from the bank.
In 2010, a Merrill Lynch trader in London who mispriced positions he had on behalf of the bank by $100 million to cover up his losses was banned by the United Kingdom's Financial Services Authority (FSA) from working in the securities industry in the UK for at least five years.
Also in 2010, a trader at Toronto Dominion Bank in the UK was fined £750,000 ($1.16 million) by the FSA for intentionally mismarking his trading positions.
In 2016, Citigroup fired a trader for mismarking his portfolio.
Also in 2016, a trader at a company authorized by the Dubai Financial Services Authority (DFSA) was banned for six years from performing any functions in connection with the provision of financial services in the Dubai International Financial Centre after he mismarked his trading book. "Former Dubai trader banned for $11m 'mismarking' scandal", Arabian Business, May 11, 2016.
In 2019, SEC announced settled charges against a former Citigroup Global Markets Inc. (CGMI) trader for mismarking a book of illiquid credit derivatives while sustaining losses from unauthorized trading in U.S. Treasury securities (USTs). "SEC Charges Former Citi Trader with Mismarking and Unauthorized Trading", SEC.gov, Sep 26, 2019.
In 2022, SEC charged James Velissaris, former Chief Investment Officer and founder of Infinity Q Capital Management, with overvaluing assets by more than $1 billion while pocketing tens of millions of dollars in fees.
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