The London Paper – 8 May 2009
Question: How can you tell when a broker is lying to you?
Answer: His lips move.
That City gag is so old that Henry 8th had his court jester beheaded when he last heard it. However, this week’s court case victory against the brokerage firm MF Financial by an independent day trader shows it still has some relevance today.
On Wednesday this day trader, Rajesh Gill, was awarded £20m after having been systematically lied to by his broker who kept pretending that Mr Gill’s short-term trades were making money just so that he continued using him. All this trading ensured that the broker made loads of commission for his firm and hence he made big bonuses totalling over ‘half a bar’ after a year of non-stop lies. Unfortunately for Mr Gill, the broker had actually managed to lose him many millions of pounds, though it appears he has now successfully more than recouped his losses via this court case.
I believe this sorry tale is symptomatic of the get-rich-quick lunatic asylum the City became over the last ten years and that there are numerous ‘take-home points’ worth listing:
1. Never, ever trust a broker. They will lie, cheat and sell their grand-mother if it enhances their bonus. As usual, the broker kissed Mr Gill’s arse to his face but referred to him as ‘a bloody dickhead’ to his colleagues.
2. The bonus system encourages short-term deception as Cityboys will pretend to make profits just to enhance their 12 month performance. This same approach explains why the boys in structured finance felt it was logical to create mortgage-backed securities that would prove massive loss-makers in the long-term but appear profitable for a few years.
3. No-one asks tricky questions when they’re making money. You’d have thought Mr Gill might have become suspicious when seemingly poor trades made cash but people don’t question success. This same tendency explains why bank bosses sat around scratching their sweaty balls saying nothing whilst fragile sub-prime mortgages appeared to generate big profits.
4. If something sounds too good to be true then it probably is. Just as the consistently stella returns made by Bernie Madoff’s fraudulent fund should have raised suspicions so Mr Gill should have felt something wasn’t kosher when his trades kept winning.
5. The City regulators, the FSA, are a bunch of toothless jokers. These characters were asked to investigate MF Financial in April 2007 by Mr Gill’s lawyer but couldn’t be arsed.
6. Winners don’t do drugs. The individual broker who conned Mr Gill has admitted he took ‘illegal drugs’ … which does not come as a huge surprise after my 12 years in the City.
Brokers are like journalists … they rarely let the facts get in the way of a good story. And since a good broking story can result in a massive bonus you can bet your bottom dollar that even as you read this some other mug is being conned out of his hard-earned dosh by a smooth-talking, coke-snorting broker.
And I should know … I used to be one.