Mismarking

Mismarking in securities valuation takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional fraudulent mispricing.[1][2] Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities' net asset value, or NAV), and thus misrepresents performance.[3][4] When a trader engages in mismarking, it allows him to obtain a higher bonus from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing.[3]

Mismarking is an element of operational risk.[5] The trader engaging in mismarking is sometimes referred to as a "rogue trader."[6]

During market downturns, determining the value of illiquid securities held in portfolios becomes especially challenging, in part because of the amount of debt associated with these securities and in part because of fewer mechanisms for price discovery.[2] As a result, during such periods illiquid securities are especially susceptible to fraudulent mismarking.[2]

  1. ^ "1QIS 2 - Operational Risk Loss Data – 4 May 2001," Bank of International Settlements.
  2. ^ a b c Eugene Ingoglia; Todd Fishman, Mark Daniels (April 22, 2020). "Amid falling markets, valuation challenges and mis-marking fraud risks rise". Investigations Insight.
  3. ^ a b George J. Benston (July–August 2006). "Fair-value accounting: A cautionary tale from Enron". Journal of Accounting and Public Policy. 25 (4): 465–484. doi:10.1016/j.jaccpubpol.2006.05.003.
  4. ^ Kent Oz (2009). "Independent Fund Administrators As A Solution for Hedge Fund Fraud," Fordham Journal of Corporate & Financial Law.
  5. ^ "Liontrust Asset Management: Annual Report & Financial Statements 2020". MarketScreener. July 21, 2020.
  6. ^ Peter Nash (2017). Effective Product Control; Controlling for Trading Desks, Wiley.