You create a useful trading model. Get the firm to start using it, then tweak it so you get more compensation. Sounds like a good way to get rich… and to get in trouble. Jian Wu is finding out. The Department of Justice filed wire fraud, securities fraud and money laundering charges against him for allegedly doing so.
Two Sigma was subject to an action earlier this year because of vulnerabilities in the their investment models. More people had access to the models and the ability to change them than was prudent. This resulted in different investment decisions from the trading models than was portrayed to investors. The earlier complaint stated that Two Sigma had waited almost four years to address the issue. The firm did reimburse the clients for the losses.
It appears that the altered models resulted in the employee pools making $450 million in gains at the expense of those client pools.
Whatever Mr. Wu did it rattled the regulators, with the SEC bringing charges and the DOJ bringing criminal charges. It looks very technical in the Indictment and the Complaint. The SEC Complaint does a much better job of the alleged actions of Mr. Wu. The math was a change to the “Decorrelation Parameters” that are set to see if it differs from other trading models already deployed at the firm.
This will be an interesting case to bring to a jury and to explain the quant models and actions to a group of non-financial professionals.
Sources:
- Quant At Investment Management Firm Charged With Securities And Wire Fraud
- U.S. v. Wu Indictment.pdf
- US charges fired Two Sigma quant researcher with fraud by Jonathan Stempel
- Quantitative Model Developer Charged with Defrauding Registered Investment Advisers
- SEC Complaint
- Two Sigma fined US$90m by SEC over trading model scandal by Lucy Carter
- SEC Charges Two Sigma for Failing to Address Known Vulnerabilities in its Investment Models