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Fraud charged in $162M loss
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October 1, 1998: 3:36 a.m. ET
Trader misled clients about options positions, SEC charges in lawsuit
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NEW YORK (CNNfn) - A rogue trader cost employees of AT&T $150 million and a Massachusetts state agency $12 million by making unauthorized trades in the options market, the federal government charged Wednesday in a securities-fraud lawsuit filed in Boston.
The trader, Bing Sung, 51, former chief investment officer at Boston's Rhumb-Line Advisors, allegedly misled his clients about his activities and exceeded the guidelines that had been set for their accounts, according to published reports.
The trades occurred in 1995 and 1996, the Wall Street Journal and the New York Times reported in Thursday's editions. AT&T first learned of the losses in September 1996, the reports said.
Sung, who resigned from Rhumb-Line in 1996, is working now as a private investor, trading for his own account and not for clients. Contacted for comment by the newspapers, he declined to say anything beyond denying the charges made by the U.S. Securities and Exchange Commission.
His attorney, Joseph L. Kociubes, denied that his client's activities were unauthorized or undisclosed. "All AT&T had to do was look at their monthly statements," Kociubes told the Journal, adding that Mr. Sung held periodic meetings with his clients and "there was not a concealing of anything."
Sung formerly had been chief trader at Harvard Management Co., which manages the endowment of Harvard University. He joined Rhumb-Line in 1991, the newspapers reported.
The alleged fraud in this case falls well short of the billion-dollar cases of unauthorized trading at firms such as Daiwa Bank, Barings Plc and Showa Shell Sekiyu, the Times reported.
But it exceeds the $128 million lost by the Common Fund, which invests for colleges, because of unauthorized trading at First Capital Strategists Inc. in 1995, the Times said. That episode prompted many institutional investors to tighten their oversight of outside financial managers.
According to the SEC complaint filed Wednesday in federal court in Boston, Rhumb-Line had agreed to manage AT&T's options programs in a conservative fashion, with no potential losses on index options of more than $6 million, and limiting the writing of options for technology stocks to $25 million in underlying value.
But beginning in early 1995, according to the complaint, Sung began to exceed those limits while at times misleading AT&T. In late 1995, Sung secured waivers from normal limits on options trading at the Chicago Board Options Exchange and the Philadelphia Stock Exchange by fraudulently saying he was hedging $9 billion in stock holdings by AT&T, according to the complaint.
Sung's positions grew so large that by September 1996, AT&T's options on the Nasdaq 100 index in the Rhumb-Line account made up more than two-thirds of the total market for those contracts, according to the complaint.
All of AT&T's losses were realized in the third quarter of 1996, according to the complaint, but were the result of almost two years of unauthorized trading.
The losses did not endanger the solvency of the clients' funds. At the time of the $150 million loss, the AT&T employee pension fund held about $47 billion, while the Massachusetts pension fund for teachers and state employees was worth $22 billion.
In conjunction with the lawsuit, the SEC announced sanctions against Rhumb-Line and its chief executive, John Nelson.
Rhumb-Line agreed to a censure, to tighten supervision of employees and to pay a $50,000 fine, the Times reported.
Nelson, who founded the firm in 1990 primarily to manage funds designed to match the performance of market indexes, agreed to a pay a $10,000 fine, to give up his role as an investment adviser for three months and to relinquish his supervisory responsibilities for an additional nine months.
Nelson, in remarks cited by the newspapers, took responsibility for the episode. "If you're at the helm, you're at the helm," Nelson told the Times Wednesday. "We hired a lot of expertise and I put confidence in him."
Nelson founded Rhumb-Lline in 1990 after serving as a division head for State Street Bank. He said his company no longer traded options and would concentrate on index funds.
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