Securities Law Blog

Former Deutsche Bank Securities broker Edward S. Brokaw has been permanently barred from the securities industry for manipulating the price of Monogram Biosciences (MGRM) stock. On June 29, 2010 a Financial Industry Regulatory Authority (FINRA) hearing panel found that the broker, based in the Greenwich, CT branch office of Deutsche Bank, ordered trades of MGRM stock in a deliberate attempt to drive down the value of the stock, which would drive up the value of the contingent value rights (CVRs) on that stock.

MGRM CVRs were created after the merger of two firms to form MGRM in 2004. The CVRs were to be valued during a 15 day period beginning May 19, 2006 and ending June 9, 2006. During the 15 day period the value of the CVRs was to be determined by the volume weighted average price (VWAP) of MGRM shares. At the end of the pricing period CVR holders would receive payment from MGRM.

According to the FINRA report, “If the final VWAP was at or above $2.90, the CVRs would be worthless. But if the final VWAP was below $2.90, CVR holders would receive a penny-for-penny payment for the amount below $2.90, down to $2.02.”

Evidence before the FINRA panel included recorded phone calls from Brokaw to the firm’s trading desk to place sell orders. The calls allegedly explained the pricing of the CVRs and the hedge fund’s instructions to sell close to the market’s open and close.

One such phone call placed by Brokaw to a Deutsche Bank sale trader said, “Take 50,000 MGRM at the market. Sell it down. Sell it as low as you want. Sell it hard, 50,000.”

The FINRA hearing panel concluded that “the objective of the selling strategy was to drive down the price of MGRM shares rather than to obtain the best price…(Brokaw) placed the orders to artificially depress the price of MGRM to impact the pricing of the CVRs.” According to the panel, for every penny that MGRM stock dropped, the hedge fund lost $29,000 in value on its shares but gained more than $180,000 in value on its CVRs.

Brokaw’s aggressive trading strategy continued for three days until Deutsche Bank’s compliance personnel reviewed the trade orders and stopped executing MGRM sales for the hedge fund’s account. Deutsche Bank then suspended, and subsequently terminated Brokaw.

At the time the pricing period began, the hedge fund represented by Brokaw held 18.5 million CVRs. If the shares had dropped below the specified price point, the hedge fund stood to gain a maximum payout of about $16 million at the end of the period. Brokaw and his family had a potential gain of about $188,000.