TORONTO (HedgeWorld.com)--The staff of the Ontario Securities Commission presented its case against Stephen Duthie, in connection with the trades that led to the demise of Phoenix Fixed Income Arbitrage LP in January 2000.
The hearing began last week with testimony by Mr. Duthie's supervisors, who have reached their own settlements with the OSC, admitting that their oversights enabled Mr. Duthie's rogue trades.
When proceedings resumed Monday, Mr. Duthie took the stand on his own behalf, and acting as his own counsel. Under questioning from OSC commissioner Lorne Morphy, Mr. Duthie said that he went "outside of the guidelines" set by the firm, because he disagreed with the firm's stated appetite for risk, but he denied having exceeded any "restrictions" set for him by his employers.
Ronald Mock, now a vice president at the Ontario Teachers' Pension Plan Board, Previous HedgeWorld Story, testified April 24 that Mr. Duthie must have been "completely aware" of the risks he was taking with the unhedged position long on U.S. Treasuries, and that his position was well outside the firm's investment parameters. He described how Mr. Duthie would portray himself as risk-averse. For example, if Mr. Duthie reached his targets in the morning, he would say, "that's it for the day, I'm not going to jeopardize what I made," Mr. Mock recalled.
The Toronto Globe and Mail, in a series of reports on the hearing by Karen Howlett, has made the point that evidence shows that Mr. Duthie did little to hide his trades--they were correctly recorded as outright purchases in various internal reports, including the electronic accounting system and daily trade blotters.
Last week, Ms. Howlett reported, Mr. Mock testified that he had believed Mr. Duthie was carrying out a matched book repo strategy, until the Bank of New York made its margin call for US$51 million, on Jan. 4, 2000. He testified that he made frantic efforts all that day to get in touch with Mr. Duthie, who had not come into work either that day or the day before.
Mr. Mock told the trader's girlfriend, Shirley Malloy, that she should get in touch with him because Phoenix "desperately needed to understand if he has left us long bonds."
Late that night, Ms. Howlett reported, she returned the call. "Stephen told me to tell you, you guys are long bonds," were her words. She also said that Mr. Duthie would be "unreachable for some time."
Phoenix Fixed Income Arbitrage's trading records show 478 trades in U.S. Treasury bonds in late 1999, between Aug. 12 (when the long position was US$181 million) and Dec. 31 (when it was US$3.3 billion).
Mr. Mock and another of the traders he supervised, Darren Payne, testified to their scramble to sell those bonds the next day without tipping off the market to their need to liquidate and turning the scramble into a fire sale. By 11:30 AM they had sold a majority of the notes, losing US$98.3 million in the process.
On Jan. 6, Mr. Duthie finally called in. "Everything I did was for the benefit of the firm," he said on a voicemail message, "it just went wrong when I tried to exit the trade."
The OSC's staff attorney, Tracy Pratt, said that the OSC could either find that Mr. Duthie's behavior was deceptive or not. If it did find deception, she said, it should ban him from trading securities for a period of 15 to 20 years. Even in the absence of deception, she added, it should ban him for five to seven years for his "blatant and callous disregard" of the clients' interests and in either case he should be ordered to pay C$85,000 to C$90,000 toward the OSC's costs, Previous HedgeWorld Story.