SEC bans Kim for hiding risky shorts from employer

2011-07-13 12:50 ET - Street Wire

Also Street Wire (U-*SEC) U.S. Securities and Exchange Commission
Also Street Wire (U-WIT) Wipro Ltd

by Mike Caswell

The U.S. Securities and Exchange Commission has fined and banned Jennifer Kim, a Canadian who worked at Morgan Stanley & Co. Inc., for her role in a scheme to conceal risky investments from her employer. The SEC said that Ms. Kim and her former supervisor, Larry Feinblum, caused the firm $24.4-million in losses after they took on significant short positions in an India-based company called Wipro Inc. (All figures are in U.S. dollars.)

To settle the case, Ms. Kim has agreed to pay $25,000 and to serve a ban from associating with any U.S. brokerages. As a term of the deal she can apply for reinstatement after three years. She did not admit to any wrongdoing in reaching the settlement.

The SEC describes the case against Ms. Kim, 31, in an administrative order filed on Tuesday, July 12. According to the SEC, she was an employee of Morgan Stanley in New York from August, 2006, to January, 2010, when the company fired her after discovering the significant losses she and Mr. Feinblum had caused. She worked at the swaps desk with seven other employees that Mr. Feinblum supervised.

The desk traded over 600 accounts that held ADRs (American depositary receipts) and other instruments, the order states. One of the arbitrage strategies that Ms. Kim employed was shorting ADRs while taking a long position in a company's stock. The strategy was risky, but it was profitable overall and Morgan Stanley supported it.

In order to manage risk, Morgan Stanley imposed limits for each trader, which it monitored electronically on a real-time basis. The system would automatically notify senior managers if a trader had exceeded the risk limits. Those managers could override the system if appropriate.

The problem, as described by the SEC, was that Ms. Kim and Mr. Feinblum knew how to trick the system into thinking that they had not exceeded the risk limits. They would enter orders that made it appear that they were within limits, and would then cancel those orders before completing them. The risk management system would not account for the cancellation.

In this way, Ms. Kim and Mr. Feinblum acquired a significant position in Wipro, so much so that they exceeded the firm's $20-million limit for exposure to a single-name emerging market security. Mr. Feinblum believed that the company's ADRs traded at a significant premium and would in time collapse.

The scheme unravelled in December, 2009, when the market moved against the positions. (The stock, which had been as low as $5.04 that year, hit a $23 high.) By the close on Dec. 16, Mr. Feinblum's trade book contained a substantial loss. When he left work that day, he told his supervisor that he had lost $7-million. The next morning, he admitted that he and Ms. Kim had repeatedly exceeded risk limits and had concealed their activities. One month later, the firm fired both employees.

Mr. Feinblum previously settled the case, agreeing to a $150,000 civil penalty and to a ban from associating with any broker. He may apply for reinstatement after two years. As with Ms. Kim, he did not admit to any wrongdoing.

The SEC does not state anything about Ms. Kim's employment history. Canadian Securities Administrators records show that she has not worked at any firm in Canada, and a FINRA search shows she has not worked at any U.S. firm since Morgan Stanley fired her