The President of Rochdale Securities, Daniel Crowley, is a friend of mine.  We went to each other's weddings and have hung out together on many occasions.  The story of Rochdale's troubles appears extremely sad.  The firm, which grew and prospered under the informed leadership of Crowley and his partners, has become unhinged because of a misdeed that may or may not have been calculated.

An employee, David Miller, bought roughly $1 billion of Apple stock, a far larger position than Rochdale had ever handled.  The firm, an institutional execution shop, typically does not buy securities for its own account.  Thus, these circumstances, which by estimates, cost the firm from the losses on the trade upwards of $5 Million, are very difficult to understand.  The firm holds about $3.5 Million of equity capital.

Rochdale was founded in 1975 and was a sleepy brokerage firm in the tradition of the small wire houses until Crowley and his partners joined in the mid-90s.  He left Hoenig & Co, since bought by ITG Inc., to begin an institutional equity brokerage capability at Rochdale.  Within a couple of years, Crowley was running the enter brokerage operation, his unit was making the bulk of the revenue for company, and the firm was soaring.  Rochdale because a distributor of independent research when Spitzer et al forced the larger firms to provide this type of independent research to their customers.  But the recent past has been hard on Rochdale and the other small firms.  The demise of the fractions, the growth of ATSs, and other types of electronic execution venues made the business more difficult.  Crowley was constantly trying to reinvent the firm – he hired Richard Bove, a well-known bank analyst, to make the firm’s capabilities more attractive.

The trade that ultimately put the firm at risk is clearly out of character for Rochdale.  Mr. Miller and his trades are now under a microscope.  Rochdale executives and regulators are trying to determine whether his actions amounted to a trading blunder or market misdeeds.  In the meantime, Rochdale is fighting for its survival. The brokerage firm has reached out to rivals, including BTIG, and ConvergEx, for a potential infusion of capital, according to a person briefed on the talks. But a white knight has not yet materialized.

The firm’s president, Daniel Crowley, said Tuesday that Rochdale was the “the victim of an unauthorized trade” and was cooperating with regulators. He confirmed that Rochdale was in talks with other brokerage firms.  When he realized something was amiss, Rochdale alerted regulators at the Financial Industry Regulatory Authority and the Securities and Exchange Commission.  With Rochdale’s capital depleted from the trade, regulators ordered the firm to immediately unwind the position.  The losses at Rochdale have crippled the small brokerage firm.  The firm has a capital cushion of only about $3.5 million supporting its operations.  Theories are now circulating inside Rochdale about what went wrong.

Some potential investors in Rochdale were told that the errant purchases were the result of a "fat finger."  That is, the trader intended to buy 165,000 Apple shares but the order was executed at 1.65 million shares.  Regulators are trying to determine Mr. Miller’s motives and how he was able to execute the trade at all.  Rochdale typically trades on behalf of clients.  But Mr. Miller made the bet using the firm’s own capital, making the Apple purchase all the more unusual. Brokerage firms like Rochdale are also required to have systems in place to prevent outsized or unauthorized trades.

"I worked at some of the biggest trading desks — Bear Stearns, Credit Suisse, Smith Barney — and no one took a position that big without getting prior approval," said Mr. Driscoll.  "It’s inconceivable that someone would be able to acquire a position of that magnitude at a small firm like Rochdale without anybody in a supervisory capacity knowing about it."