How A Trader (Allegedly) Stole $300,000 From Citi Using An Everyday Tax Trick

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[credit provider=”AP”]

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?

[slideshow]
[slide
permalink=”el-rhazi-works-at-citi-as-a-desk-quant-1″
title=”El Rhazi works at Citi as a “desk quant.””
content=”Another word for El Ehzi’s job is a ‘flow trader.’

He takes in orders and ‘makes a market’ for them, in some cases using Citi’s account.

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”usually-a-client-gives-him-a-buy-and-sell-order-and-he-finds-the-other-side-to-complete-the-trade-2″
title=”Usually a client gives him a “buy” and “sell” order and he finds the other side to complete the trade”
content=”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.

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”but-he-used-his-own-account-for-both-orders-on-november-23-2010-according-to-prosecutors-3″
title=”But he used his own account for both orders on November 23, 2010, according to prosecutors”
content=”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.

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”called-a-wash-sale-its-usually-a-way-to-cheat-on-your-taxes-4″
title=”Called a “wash sale,” it’s usually a way to cheat on your taxes”
content=”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.

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”normally-tax-cheats-need-a-conspirator-to-help-them-trade-5″
title=”Normally tax cheats need a conspirator to help them trade”
content=”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.

Click here to download the lawsuit against El Rhazi
image=”http://static.businessinsider.com/image/4c2de7fc7f8b9a1e49bf0600″
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[slide
permalink=”but-instead-el-rhazi-used-the-tax-cheat-to-scam-citi-according-to-prosecutors-6″
title=”But instead, El Rhazi used the tax cheat to scam Citi, according to prosecutors”
content=”The charges against El Rhazi say he ‘repeatedly caused the Citi account to lose money by trading with his personal account.’

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”he-did-it-by-creating-fictitious-palladium-and-platinum-trades-between-his-account-and-citis-say-prosecutors-7″
title=”He did it by creating fictitious Palladium and Platinum trades between his account and Citi’s, say prosecutors”
content=”Palladium and Platinum are precious metals that are more expensive than gold.

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”say-for-example-citi-offers-to-find-a-buyer-for-a-sellers-order-8″
title=”Say, for example, “Citi” offers to find a buyer for a seller’s order”
content=”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.

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”but-instead-a-trader-at-citi-acts-as-both-buyer-and-seller-9″
title=”But instead a trader at Citi acts as both buyer and seller”
content=”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.

Click here to download the lawsuit against El Rhazi
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[slide
permalink=”then-he-can-buy-citis-future-contracts-at-some-cheap-off-market-price-10″
title=”Then he can buy “Citi’s” future contracts at some cheap “off market” price”
content=”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.

Click here to download the lawsuit against El Rhazi
image=”http://static.businessinsider.com/image/4dac94294bd7c8ec031a0000″
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[slide
permalink=”and-then-make-citi-buy-the-contract-back-higher-later-11″
title=”And then make Citi buy the contract back higher later”
content=”According to the charges against him, $300,000 effectively transferred out of Citi’s account.

Click here to download the lawsuit against El Rhazi
image=”http://static.businessinsider.com/image/4d0b97b64bd7c89d4b1f0000″
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[slide
permalink=”the-price-difference-ends-up-in-his-account-12″
title=”The price difference ends up in his account!”
content=”The scheme paid off: It resulted in $300,000 in profits to his personal account.

Click here to download the lawsuit against El Rhazi
image=”http://static.businessinsider.com/image/4bc32f127f8b9adf36d60100″
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[slide
permalink=”think-he-made-more-than-your-average-tax-cheat-think-again-13″
title=”Think he made more than your average tax cheat? Think again!”
content=”There are TONS of households making $500,000 per year that pay no taxes.

Click here to see 20 facts about taxes that will make your head explode >
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[/slideshow]