RBS Blocked $8.8 Million Bonus for CDO Trader in Lawsuit

Royal Bank of Scotland Group Plc’s former head trader for collateralized debt obligations lost out on about 5.6 million pounds ($8.8 million) in bonuses when he was fired for manipulating the price of securities, according to documents at a London employment tribunal.

Alex Mallinson, who is suing for unfair dismissal, said the lender withheld deferred cash and share awards after finding him guilty of gross misconduct. Edinburgh-based RBS “unfairly terminated my employment in order to make an example of me,” he said in written evidence made available today.

RBS employees noticed Mallinson had sold bonds and then bought them back for slightly more the same day, a practice called a “wash trade,” bank compliance officer Sarah Goodsell said in a witness statement released earlier this week.

“It seemed the sole purpose” of the first “trade had been an attempt to manipulate the market and to reduce the market price of a particular bond,” she said.

RBS was fined about $612 million yesterday by regulators who found the bank had tried to rig interest rates. The U.K. Financial Services Authority said RBS colluded with other banks setting the London interbank offered rate, including another derivatives trader, who wasn’t identified, entering into wash trades to make corrupt payments to a broker.

Mallinson’s case isn’t connected to the Libor probe. His lawyer, Danielle Spiers, didn’t immediately respond to e-mails seeking comment.

‘Gross Misconduct’

“Alex Mallinson was dismissed for gross misconduct and the bank does not accept there is substance to his claim and will defend it,” RBS spokeswoman Rebecca Nelson said in an e-mailed statement.

Mallinson argued in his evidence that the trades had been to reduce the administrative burden on his colleagues to comply with internal pricing systems, not attempted market abuse.

Mallinson, who now works at Chalkhill Partners LLP, said he would be willing to return to work at the bank if he was cleared of gross misconduct.

The former trader’s offense was so serious he lost the right to any deferred bonus awards, RBS global head of prime services Fabian Shey said in written evidence given to the tribunal yesterday.

Shey, who the bank asked to review Mallinson’s case, said the trader admitted to wrongdoing in interviews, but denied that it amounted to gross misconduct.

Internal Pricing

Mallinson told him the trades had been to manipulate the bank’s internal pricing system and hadn’t had an impact on customers, Shey said.

Collateralized debt obligations package bonds or loans into a pool of assets that are divided into tranches of varying risk and return.

RBS’s lawyer said at the start of the hearing earlier this week the lender was still investigating trading at the CDO desk, and was being sued by two other employees at the tribunal.

When challenged by the compliance team about why his trading didn’t match prices on RBS books, Mallinson initially said the bonds were highly illiquid and prone to price fluctuations, according to Goodsell’s evidence. He later told her the trades had been an attempt to create a price low enough to keep the desk within its trading limits.

The former RBS trader in the Libor case who entered into wash trades was Neil Danziger, people with direct knowledge of the talks said yesterday. The trader would place two or more matching trades with a counterpart at UBS AG that canceled each other out while triggering a payment of fees to a broker, regulators said. The deals were done to influence brokers to coerce other banks to submit altered yen Libor rates.

Inadequate Controls

RBS didn’t detect the wash trades used by Danziger until the FSA raised the issue during its investigation, the regulator said yesterday. The bank didn’t have adequate systems and controls in place to detect wash trades until March 2012, according to the FSA.

Mallinson’s case is the latest lawsuit against banks by fired employees who say they were treated unfairly. Job cuts in financial services reached a four-year high last month, while banks have stepped up scrutiny of staff following high-profile trading scandals including former UBS trader Kweku Adoboli’s unauthorized $2.3 billion loss.

Compensation for unfair dismissal is normally capped at 74,200 pounds at U.K. tribunals, unless there is proof of discrimination or other wrongdoing by an employer.

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