First, the background:
Brokaw's hedge fund client held approximately 18.5 million MGRM CVRs (a type of derivative). Brokaw and his family owned 217,000 of the CVRs.
For every penny the final VWAP (volume weighted average price) dropped below $2.90, the value of the hedge fund's CVRs increased by $185,000.
- Hedge fund places an order with Brokaw to sell 50,000 MGRM shares ~ market open and another 50,000 shares ~ close.
- Brokaw calls a Deutsche Bank sales trader and says, "Take 50,000 MGRM at the market. Sell it down. Sell it as low as you want. Sell it hard, 50,000." (There is a tape recording.)
- Sell off
- MGRM shares dropped in one minute from $2.06 to $1.94
- Brokaw's aggressive placement of those sell orders continued for three trading days
The target price was the final MGRM VWAP at $2.02, when the maximum payout of $.88 per CVR would be paid. If MGRM hit $2.02, Brokaw's family would get $188,000. The hedge fund would make around $16 million.
But then, this happened, according to FINRA:
- Deutsche Bank's compliance personnel reviewed Brokaw's orders,
- DB decided it would no longer execute MGRM sales for the hedge fund's account.
- Deutsche Bank first suspended, then terminated Brokaw
The hearing panel judged that "the objective of the selling strategy was to drive down the price of MGRM shares rather than to obtain the best price ... (Brokaw) placed the orders to artificially depress the price of MGRM to impact the pricing of the CVRs."
Ex Deutsche Bank Broker Edward Brokaw Barred From Securities Industry
FINRA Hearing Panel Bars Broker for Manipulating Stock Price Downward to Benefit Hedge Fund Client
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