The One With The Options Pricing Theft

Some financial fraud is easy to spot. Some is hard to spot. Some I barely understand. Kevin Amell was very clever in hiding his alleged fraud and I’m not sure I understand exactly how he pulled it off.

Mr. Amell was a fund manager at Eaton Vance for its Risk-Managed Diversified Equity Income Fund. The fund used options to hedge some of its positions and Mr. Amell had some responsibility for the purchase or sale of call options. According to the complaint, on at least 265 occasions, Mr. Amell pre-arranged the purchase or sale of call options between the Fund’s brokerage accounts and his personal brokerage account at prices that were disadvantageous to the Fund and advantageous to Amell. He generated almost $2 million in profits for himself.

Mr. Amell carried out the fraud by placing orders in his personal brokerage accounts to buy specific options at a specific price and at the same time placed orders on behalf of the funds to sell the same options at the same price. He took advantage of the trades with wider spreads and exploited the spread. The fund order was just outside the midpoint of the spread so the market would not take the trade. He took the trade in his personal account and then sold for the difference in the market.

It seems like one of those frauds where the scammer just takes a little bit each time.

One thing hanging out there for me, from a compliance perspective, is how did he get caught.

He did not report the account to Eaton Vance and did not tell the brokerage that he was an employee of Eaton Vance. That means it would be hard for the firm to find the fraud. He clearly violated the firm’s policies.

In paragraph 28 of the complaint, the SEC notes that the initial brokerage account he used for the fraud was closed by the brokerage. I assume the broker’s compliance noted something was fishy. Mr. Amell opened an account at a different broker-dealer and resumed the fraud for another year. Perhaps that second brokerage noted the weird trades and decided to report it to the regulators instead of just closing the account.