Risk & Compliance

Ex-RBS Trader Pleads Guilty to CLO Fraud

“Fraud in the fixed income markets is a secret and unfair tax on investors everywhere,” said a U.S. attorney.
Matthew HellerMarch 12, 2015

A former Royal Bank of Scotland Group trader has pleaded guilty to defrauding customers of millions of dollars by misrepresenting the prices paid and offered for securities to boost profits for himself and the bank.

Matthew Katke, 34, entered his plea on Wednesday in Connecticut federal court to one count of conspiracy to commit securities fraud in connection with his trading of collateralized loan obligations (CLOs) while he worked for RBS as a broker-dealer between April 2008 and August 2013. He faces a maximum of five years prison at a sentencing scheduled for June 3.

“Fraud in the fixed income markets is a secret and unfair tax on investors everywhere,” U.S. Attorney Deirdre M. Daly in Connectitcut said in a news release. “Broker-dealers, and the people who work for them, need to understand that a market practice that is at odds with the securities law is a crime that carries serious repercussions.”

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According to Bloomberg, Katke’s case “reveals a new front for investigators looking to clean up markets for complex and often hard-to-value debt that helped cause the 2008 financial crisis. It shows how scrutiny is expanding past the mortgage-linked bonds at the heart of the meltdown and to CLOs, whose reputation largely escaped without the same taint.

Prosecutors said Katke and unidentified co-conspirators made misrepresentations to induce buying customers to pay inflated prices and sellers to accept deflated prices for bonds.

In some transactions, he allegedly misrepresented the CLO seller’s asking price to the buyer (or vice versa), keeping the difference between the price paid by the buyer and the price paid to the seller for RBS. In others, prosecutors said, he misrepresented to the CLO buyer that bonds held in RBS’s inventory were being offered for sale by a fictitious third-party seller, which allowed him to charge the buyer an extra commission that RBS was not entitled to.

The investigation uncovered at least 20 victims of the scheme, including firms affiliated with recipients of federal bailout funds through the Troubled Asset Relief Program, according to the government.

“Defrauding a TARP recipient bank is the same as defrauding the American taxpayers who funded the TARP bailout,” Christy Romero, Special Inspector General for TARP, said.