What is a “Rogue Trader?”

by InvestorLawyers on November 3, 2011

in Suitability,Unauthorized Trading

The term “rogue trader” has been used in recent news and often accompanies reports of catastrophic losses. According to the San Francisco Chronicle, “a rogue trader is a trader who takes unauthorized investing risks to attempt massive gains, but makes reckless choices in the process.” Therefore, action taken against a rogue trader by a stock fraud lawyer can involve accusations of unauthorized trading and/or unsuitable investments. In addition, rogue traders can face criminal charges for breach of trust, collusion and fraud if caught.

What is a “Rogue Trader?”

The actions made by rogue traders are unethical in that they act outside of the authorization of their supervisors or companies and/or do not trade within the limits that have been set for them. Company rules and government regulations are often of no concern to a rogue trader — at least not until they are caught.

The bane of a rogue trader’s existence is a sudden and major loss that results from their risky behavior. Though this is detrimental to the trader, it is also a major concern for the company they work for, as well as their clients. Another danger to the success of a rogue trader is the attention of regulatory authorities and the reporting of their behavior by a co-worker. This is one reason why regulations within companies that encourage employee reporting are critical. Rogue traders can do extensive damage to the company they work for, as well as the company’s executives and share price.

There have been many rogue traders in recent history. Barings bank was brought down by Nick Leeson, a rogue trader who incurred a $1.4 million loss. UBS lost 1.3 billion pounds because of Kweku Adoboli. In 1992, several brokers, including Harshad Mehta, attempted to manipulate the Bombay Stock Exchange. The largest loss that resulted from a single rogue trader, however, was the $7 billion loss suffered by Societe Generale of France via trader Jerome Kerviel. Trader Jordan Belfort lost $200 million but is probably more well-known for his outrageous acts, like the trading floor midget-throwing contest he organized, or the many vehicles — including a yacht — he destroyed.

Because of their erratic behavior and reckless trading decisions, rogue traders are dangerous to the financial industry. Their actions are not only dangerous to individual investors, but to the stability of major companies whose demise could affect the financial market greatly. In some ways, rogue traders are one of the most dangerous types of securities fraudsters.

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