Trader's Fraud Caused Broker-Dealer's Collapse, Jury Hears

By Lauraann Wood · Listen to article

Law360 (January 24, 2024, 7:38 PM EST) -- A now-defunct Atlanta broker-dealer's former head of fixed income trading caused the firm to bleed money and eventually go under by engaging in several years of bond trading activity that he himself described as fraudulent, a federal prosecutor told an Illinois jury Wednesday.

Former trader Keith Wakefield caused now-shuttered IFS Securities Inc. 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," Assistant U.S. Attorney Sean Franzblau told jurors to kick off an anticipated two-week trial.

The government will prove Wakefield knew his trading activity was improper by letting the jury hear a recorded phone call in which the former trader acknowledges as much while talking with a coworker, Franzblau said. The recording captures Wakefield describing trades he booked and profits he reflected in IFS' records as "fake," acknowledging that he was making unauthorized trades and explaining the ways he concealed his scheme from the company's CEO, the prosecutor said.

But "most importantly, you will hear the defendant describe his conduct, in his own words, as 'fraudulent,'" he told the jury.

Wakefield's attorney, however, said the jury shouldn't immediately buy the prosecutor's assertions and should keep an open mind throughout trial because "what actually happened is pretty straightforward." The government simply made the same mistake as Wakefield's bosses by jumping to conclusions about why IFS lost so much money before it shut down, James Vanzant of Blaine & Vanzant LLP said during openings.

Wakefield wore many hats as IFS' fixed income head and was stretched particularly thin in mid-2019 as he was balancing personal urgencies alongside his work responsibilities, Vanzant said. The former trader made the mistake of forgetting to cover a $10 million trade one day, and "the problem is that was a chunk of change, so Keith decided he had to trade his way out of it a little at a time," the attorney said.

In the same way things eventually "get out of whack" for jugglers or plate spinners, "that's what happened in August 2019," Vanzant said. The system eventually became unsustainable and things began to collapse, but former IFS CEO Alex McKenzie didn't listen to Wakefield's explanation of what was happening, so "he panics, sells, [and then] IFS loses millions and it collapses," he told the jury.

The government charged Wakefield with one count of securities fraud and three counts of wire fraud in 2021, alleging he caused $30 million in losses and bankrupted IFS by claiming inflated commissions and engaged in unauthorized speculative trading in U.S. Treasury bonds. He tried to recoup initial losses by making more bond trades, but those just resulted in further losses, prosecutors said.

Wakefield also embezzled about $820,000 from IFS by reflecting false commissions, the government claims. In one instance, for example, Wakefield claimed a $64,000 profit for one of his trades when the actual profit was only $1,848, which caused IFS to pay him thousands of dollars in commissions he didn't earn, Franzblau said Wednesday.

Trial evidence will also show that Wakefield's trades were "way, way beyond" the risk limitations IFS placed on its traders, and he covered his tracks by entering false offsetting trades in the company's books and records to make his at-risk trades appear as though they were riskless, the prosecutor said.

Although Wakefield's fraud took two different forms, they each involved lying to and keeping important information from people inside and outside IFS in "an effort to cover up his crimes of bleeding money from the firm's own coffers and into his pockets, and betting big with money that did not belong to him through bets that he was not authorized to place," Franzblau told the jury.

Wakefield's false offsetting transactions involved booking trades with himself using IFS accounts that he controlled at two different clearing brokers, the prosecutor said. Pairing his real trades with his fake trades essentially operated as "a smokescreen that concealed all of the real trades the defendants was prohibited from making," he said.

"In essence, the defendant was placing huge bets with house money that the firm did not know about and which exposed the firm to enormous financial losses that it could not sustain," he told the jury. "In the end, that risk caught up to the defendant. He bet wrong on multiple trades and, as a result, the firm was wiped out, the firm and its customers lost tens of millions of dollars and hundreds of people lost their jobs."

The government says the jury will hear Wakefield acknowledge the fraud in the recorded phone conversation with former IFS technology chief Kristiann Sheedy, which was held the same day IFS closed its doors. But Vanzant told the jury that prosecutors have put too much stock into the recorded line, in which Wakefield can be heard saying, "so think fraudulent here if you want to think in terms of fake gains."

"The problem is this is one sentence, about 11 minutes into a 45-minute call," Vanzant told the jury during openings. And the call was placed by IFS' technology chief "with the specific intention of getting Mr. Wakefield to say something he didn't mean," the attorney said.

"It makes me think of another quote that I think about a lot — 'Consider it possible you may be mistaken,'" he said.

Because of his role at IFS, Wakefield understood how the company's trading systems worked, as well as "the fine minutia" of what could and couldn't be done, Vanzant told the jury. But the systems didn't communicate with each other well, which meant some information that had to be entered manually in one system could simply be typed into another system, and "that's part of the problem with what's happening in this case," Vanzant said.

However, when McKenzie and Sheedy saw such significant losses in IFS' books, "they immediately jump[ed] to fraud," Vanzant said. And when McKenzie asked Sheedy to look into the issue, the technology chief had "already decided it was fraud" and set out to "hunt" Wakefield, he told the jury.

"To do that, he gathers up a bunch of information that he doesn't 100% understand [and] asked Keith about it," Vanzant said. "Keith explains it, Alex doesn't understand, and that's how we get here, because Alex and Kristiann jumped to conclusions on something they didn't understand."

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 Kelly Duncan.

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