Thomas Anthony Chrestman an RR with Saxony Securities, ... settled FINRA charges he engaged in pre-arranged trading of collateralized mortgage obligation (CMO) bonds in a firm trading account - his contra-party was a registered principal/trader or another trader, whose transactions the principal also coordinated.  The principal apparently pre-arranged and directed the trades, set the price of the bonds and, simultaneously, agreed to repurchase them from Chrestman at a specified time, at an agreed-upon price that provided Chrestman with a profit.   FINRA notes that Chrestman didn't understand all the risks and attributes of the “inverse floater” CMOs he was trading, but he did the trades supposedly because the principal asked that he do so.  Chrestman couldn't ascertain whether the transaction prices were at or away from the current market.

The registered principal consistently repurchased, or caused the repurchase of, the bonds within a short time after Chrestman acquired them.  The transactions, however, were not without risk and an increasing number of transactions were effected at prices away from the current independent market - had the principal not repurchased the bonds, and the firm tried to sell the bonds in the open market, it would have incurred losses.  Chrestman was fined $20K and suspended for 3 months.   This is FINRA Case #2008012444204.   [April 2011 Disciplinary Actions]

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Like Mr. Chrestman, Anthony Edward Guaimano, a Registered Principal, ... settled FINRA charges he engaged in pre-arranged trading of CMO bonds in a proprietary trading account of his member firm.  While working for Stone & Youngberg in Alamo, CA, Mr. Guaimano effected CMO bond trades, consisting of paired purchases and sales, in the firm’s prop trading account with a registered principal and trader as the contra-party.  Each pair of matched transactions was pre-arranged and directed by the registered principal.  The bonds were traded at prices consistent with the current market for the securities, though simultaneously, the principal agreed to repurchase them from Guaimano, at a specified time, at an agreed-upon price that usually provided Guaimano’s firm with a profit. 

Guaimano apparently participated in pre-arranged transactions in which he did not take a profit, but, as a result of the riskless principal CMO transactions in the proprietary account, he generated trading profits, markups and interest income for his firm of some $455,000.  Like Chrestman, Guaimano participated with the principal as an accommodation based upon Guaimano’s belief that the principal was “refreshing” his CMO bond inventory in order to maintain positions he wished to maintain and still be in technical compliance with inventory risk controls at his employer.  

However, unlike Chrestman, Guaimano knew, or should have known:

• that the pre-arranged nature of the trades, particularly the agreement that the principal would repurchase the securities in short order, caused beneficial ownership of the securities to remain with the principal’s employer. 
• that the principal’s effort to create the appearance of compliance with the inventory restrictions by liquidating positions could only succeed if the principal concealed from his employer the fact that he had committed to repurchase the bonds from Guaimano at the same or a higher price. 
• that his participation in the pre-arranged transactions enabled the principal to deceive his employer as to its inventory positions and risk.  
  

He was fined $10,000 and suspended 6 weeks.  This is FINRA Case #2008012444205.    [April 2011 Disciplinary Actions]