A Citi trader is accused of using the thinking behind your average tax cheat to scam Citi out of $300,000.The craziest thing: any flow trader at any firm could do it – easily!
Otmane El Rhazi allegedly used a common tax cheat called a “wash sale” to steal $300,000 from Citi by faking about 24 trades of Palladium and Platinum futures contracts, according to prosecutors. (Click here to download the lawsuit against El Rhazi.) Only instead of saving money on his taxes, he made $300,000.
El Rhazi was charged last week by the CFTC with intentionally causing each trade to profit his account at a loss for Citi’s account.
Curious how it works?
If for example, a client wants to buy a futures contract for palladium, he makes a bid and El Rhazi tries to find him a seller.
The seller could be another client or Citi's own account.
According to the lawsuit against him, on ~24 days between November 23 2010 and April 5 2011, El Rhazi engaged in a series of palladium and platinum futures transactions (offered by NYMEX on the CME Globex platform) and in doing so, caused the Citi account to trade in illiquid contracts opposite his personal account at off-market prices.
In order to write down profits and decrease taxes, someone sells a stock for less than they bought it, takes a temporary 'loss,' and then buys it back later.
The advantage of taking a temporary loss is that they don't have to pay taxes on it.
Normally, tax cheaters need another party to engage in the 'wash sale' with. And they need an electronic exchange over which to do it.
But because Rhazi's job at Citi was to find buyers for the sellers, he could act as both over the electronic exchange.
He did it by creating fictitious Palladium and Platinum trades between his account and Citi's, say prosecutors
We're not sure exactly how El Rhazi's trades worked, but this is one way he could have done it.
It was his job to make a market by matching buy orders with sell orders, and he could have exploited it by creating his own buyers and sellers.
From the list of charges against him, it sounds like El Rhazi made the trades against Citi's account at 'off market prices.'
The 'off market' prices might be how Citi caught him.
We're not sure exactly how El Rhazi's trades worked, but that's one way he could have done it.
He also could have traded the reverse, by selling a futures contracts to Citi and then buying it back cheaper.