Ex-Trader Tells Jury $30M Losses Were Mistakes, Not Fraud

By Lauraann Wood · Listen to article

Law360 (February 5, 2024, 10:44 PM EST) -- An ex-trader charged with tanking his former employer by claiming inflated commissions and entering unauthorized trades that caused $30 million in losses testified Monday that he wasn't trying to defraud others but rather cover his hedges and correct significant mistakes he'd made while trading.

Continuing testimony that began Friday, defendant Keith Wakefield said that while he typically hedged his municipal and U.S. Department of the Treasury bond trades at IFS Securities Inc., his trading activity preceding the broker-dealer's demise in 2019 stemmed from efforts to cover a multimillion-dollar buy he couldn't enter by the end of a trading day and to correct a "fat-finger" ticketing error that he still struggles to understand or explain.

Wakefield said the multimillion-dollar buy mistake happened because he'd sold about $40 million worth of 10-year bonds into the market intending to buy them back at the end of the day when prices had spiked and interest rates had decreased. But an all-day meeting with IFS' investment banker and a public official tied Wakefield up for several hours and the market had closed by the time he returned to his desk to buy the bonds back, he testified.

Options for resolving that kind of mistake include closing the entire trade, entering a smaller one that would leave the trader with a loss to make up with several smaller trades or increasing the size of the trade, Wakefield testified.

"I know it was my choice with how to deal with that then," he said. "In the heat of the moment, I thought the right thing was to do more."

Wakefield testified that he was spread particularly thin and struggling to focus on work at the time, as he was wearing several hats at IFS and navigating personal family issues. But that struggle led Wakefield to log a trade in June 2019 as though its price per share was thousands of dollars different from its actual contract price, which made IFS' trading account seem as though it had $1.8 million in it and "was wrong from the moment I saw it," Wakefield testified.

"I knew that was wrong, and I was trying to figure out how to fix it," he said.

Wakefield testified that he entered another trade to see if he could create the opposite effect of his "fat-finger" trade, even though he wasn't sure how he'd created it in the first place. But the market prices continued to move unfavorably through July 2019, so Wakefield turned his 10-year bonds into 30-year bonds to try and reign in his hedge, he testified.

But that was a "horrible" idea, in retrospect, because the market is unpredictable, Wakefield said.

"It just opened us up to more risk than we needed to have," he testified.

Wakefield also testified during his cross-examination that he felt bad for his performance at IFS, saying he "was a horrible trader." Prompted to clarify the sentiment during redirect examination, he testified that he did "a horrible job at trading," and that he didn't take issue with being fired because his performance "sucked."

"While I felt that I had the authorization for what I was doing, and I was not trying to enrich myself ... I was trying to fix a problem and I ultimately made it worse," he testified. "I'm not denying that I'm in the center of this, and if I wasn't there ... I don't know what would have happened, but I'm a big player in destroying [the] company and I feel horrible about this."

The government asserted during trial openings that Wakefield caused the now-shuttered IFS and its customers to lose tens of millions of dollars by claiming "hugely inflated" commissions on secondary bond market trades he brokered and using IFS' money to enter false and unauthorized trades that "wildly exceeded the firm's risk limitations." He tried to recoup initial losses by making more bond trades, but those just resulted in further losses, prosecutors said.

Wakefield testified during his cross-examination that the trades the government characterizes as "fake" are not how he thought of them when he entered them. During his cross-examination, he testified that he thought of them as "inventory trades" and that he entered them at former CEO Alex McKenzie's request.

Wakefield also testified that most of the millions IFS lost happened after he was already fired from the firm and McKenzie had taken a detrimental approach to settling IFS' outstanding trades. The losses "absolutely" stemmed from trades Wakefield had put on the books, but if another person executes them in a way that loses money, "you can look back at the person who entered the trades and say, 'Well, you lost all this money,'" the former trader said.

"It didn't have to be that way," he testified.

Wakefield is represented by Holly N. Blaine and James G. Vanzant of Blaine & Vanzant LLP.

The government is represented by Sean Franzblau and Bradley Tucker of the U.S. Attorney's Office for the Northern District of Illinois.

The case is USA v. Wakefield, case number 1:21-cr-00614, in the U.S. District Court for the Northern District of Illinois.

--Editing by Jay Jackson Jr.

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