Traders Caught Up in Wall Street Probes Switch to Shadow Banking

  • At less regulated firms, ‘scarlet letter’ matters less
  • Fintech startups, small brokerages among beneficiaries

Some mortgage bond traders tangled up in investigations are moving into the shadow banking system, where their new employers have greater latitude to hire people with blemishes on their records.

More than 20 traders at big banks left their jobs, or were pushed out, amid a wave of U.S. government and internal bank probes into misconduct in the trading and pricing of mortgage bonds and other complex debt in recent years, according to a Bloomberg review of employment records. Many of those professionals caught in the dragnet since 2013 are finding their records tarnished even if they were never charged or left voluntarily. At least 10 have ended up at online lenders, privately held brokerages, and other less-regulated firms, interviews and documents show.  

“In the banking industry, if you have had a regulatory issue, you are living with a scarlet letter,” said Seth Taube, a partner at law firm Baker Botts and a former prosecutor for the U.S. Securities and Exchange Commission, when asked about the traders who have left Wall Street. “People who are unemployable in the regulated industry go to the unregulated industry.”

Shrinking Banks

The hires underscore how scrutiny of one part of the financial system, namely heavily regulated banks, is helping to feed the growth of less-regulated parts. Big lenders like Citigroup Inc. and Morgan Stanley have cut more than 500,000 jobs since the 2008 financial crisis, thanks in part to increased government oversight. Many smaller firms in the shadow banking system have meanwhile been hiring. The shadow banking system includes companies that lend and borrow outside of conventional banking, including small investment banks that help package loans into bonds.

Read more: Why shadow banking is booming -- a QuickTake explainer

Consider Alejandro Feely, a trader who resigned last year from a senior role at Morgan Stanley after the bank looked into allegations about his conduct at a former employer, according to a public employment record. The allegations were part of the U.S. probe into the trading of mortgage bonds and other complex debt, people with knowledge of the matter said, without commenting further. At the end of September, Brownstone Investment Group, a trading and brokerage firm, hired him. Feely and Morgan Stanley declined to comment.

Brownstone last year hired another Wall Street veteran, Joe Reardon, who had been fired by Deutsche Bank AG after the bank received a regulatory request for information, reviewed communications, and found he had violated internal policies, according to an employment record. Reardon didn’t respond to messages seeking comment. Brownstone representatives didn’t comment when asked about both Feely and Reardon.

Moving On

Or consider Ben Morganstein, a mortgage bond trader who left JPMorgan Chase & Co. after getting put on leave amid a probe in 2014. He left the bank after it asked to speak to him about trading related-communications, according to regulatory documents obtained by Bloomberg. He was later hired by AOC Securities, a brokerage affiliated with fund manager Angel Oak Capital. Morganstein didn’t return messages seeking comment, and AOC declined to comment.

Or Ben Solomon, a former trading head at Deutsche Bank, who was let go last year amid an internal investigation into commercial mortgage bonds. He joined an online lender this year.

Judd Burstein, Solomon’s lawyer, said in September 2015 that Deutsche Bank mishandled the incident that led to his being discharged, and that his client did nothing wrong. Solomon is trying to get his employment record expunged. Deutsche Bank spokeswoman Amanda Williams declined to comment.

Less Regulated

Financial technology companies including online lenders are usually hiring employees for roles that don’t require licenses or where they may not be overseen by securities regulators, said David Wechsler, an employment lawyer who works extensively with Wall Street clients. Because the companies are more lightly regulated, any past issues may be less relevant. They carefully vet former Wall Street employees that were let go, or left amid an investigation, Wechsler added. 

Within the past year, Wechsler has seen about a half dozen former bank employees with blemishes on their records get jobs at financial tech companies. Two years ago, before the online lending industry started to mushroom, that figure would have been closer to zero, he said.

Recruiters have seen a series of candidates that got caught up in the probes, said Mike Karp, chief executive officer and a co-founder of the recruiting firm Options Group.

“Our first question to candidates is, ‘do you have any previous or pending compliance issues?’” Karp said. If so, “we usually advise them to consider their options, like working at fin-tech companies,” he said.

Funding Loans

For the financial technology companies, the former Wall Street traders can fix a problem that’s increasingly hampering the firms: funding the loans they make. Companies including LendingClub Corp. and Social Finance Inc. originally matched investors online with borrowers who needed credit. As they’ve grown, they’ve sought other avenues for financing their lending, including selling bonds. The professionals they hire from banks can help put these deals together.

Solomon was let go from Deutsche Bank after the bank reviewed his communications and his supervision of his employees in response to a regulatory request for information about commercial mortgage bond trading, a Financial Industry Regulatory Authority record shows. The bank concluded he had violated internal policies, according to the documents.

He was hired by David Haber, co-founder and chief executive officer of online lender Bond Street, who said that Solomon was upfront about the terms of his leaving Deutsche Bank. After doing some homework, he felt comfortable considering Solomon for the position. “Ben’s experience building world-class credit businesses will be invaluable,” Haber said.

When Solomon was let go, he spoke to friends who had moved from Wall Street to online lenders and recommended the switch. They talked about how much the industry was growing. A report from Goldman Sachs Group Inc. last year estimated that these companies could make $1.7 trillion of loans that traditional lenders would otherwise make.

“I had a great career on Wall Street,” Solomon said in an interview earlier this year. “I learned a lot, but I am looking forward now.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE