Mismarking: when the price is a number someone types
Mismarking corrupts a recorded value, not a market price: the mark feeds profit and loss, fund NAV, bonuses, fees and lending. Of 15 library records tagged mismarking, ten charge the marker with fraud and five charge firms or officers over controls. The CFTC's 2013 JPMorgan order, often cited as mismarking, instead found real trading to be a manipulative device.
A trader on a Citigroup rates desk marked a set of inflation options wrongly for months. The options rarely traded, so nobody could point to a market price that contradicted him. The desk’s own price check, run each month-end, should have caught it, but the SEC’s order says the spreadsheet behind that check had a formula error that understated the effect of the volatility gap by a factor of 100. By the time the firm looked, the options were overvalued by $39.4 million.
Nothing about that episode touched a public price. No one bought or sold anything to make it happen. The false thing was a number, and it was a number the firm believed because a control that ought to have doubted it was flawed. That is mismarking, and it is why the technique deserves separate treatment from the price-moving conduct this site mostly catalogues.
Where a mark goes
Every position has a recorded value, and much else is computed from it.
The mark sets the desk’s reported profit and loss or a fund’s net asset value. It sets the collateral a counterparty asks for and the amount a lender will advance. In a fund it sets the performance and management fees. So the incentive to move it is direct, and the cases record each of the motives: hiding a loss, earning a bonus, raising fees, borrowing more.
The difficulty for the holder is the check. Firms compare marks with vendor or dealer prices inside a tolerance band. The record shows how that band gets used. In one CFTC order the trader marked a rates curve away from broker prices while generally staying inside the limits of the controls meant to detect that, and the overstatement reached about $25 million at its peak (Natixis, 2022).
The argument: it changes what people see, not what the market pays
Most of the library’s records support one point. In these matters the falsehood is a recorded value and the people harmed are those who relied on it.
- A Citigroup director was found by a federal court, on consent, to have entered false end-of-day values for ethanol futures, with about $42.4 million in resulting losses to Citi (Brooks, 2014).
- A former Deutsche Bank managing director was found by the CFTC to have mismarked inflation swaps to hide estimated losses of more than $16 million, and to have altered earlier versions of the internal spreadsheet afterwards. The bank found it, reported it and received a declination (2018).
- A hedge fund portfolio manager was found to have changed model settings such as discount curves and day-count conventions to lift the book’s profit, and ordered to give up a $600,000 performance bonus (2019).
- In an SEC action two hedge fund managers were alleged to have used sham broker quotes to mismark as many as 28 securities a month for 18 months. The SEC says one was convicted after a trial (Lumiere).
- Live Well Financial and its chief executive were charged with submitting inflated prices for reverse-mortgage bonds to a pricing service that would republish them, so that repo lenders advanced more than the bonds supported. The SEC’s complaint says the bond portfolio was carried at $570 million after starting at $71 million, and that lenders were left with exposure above $80 million (2019).
Those are allegations or settled findings as stated in each release, not a set of court judgments. The Live Well complaint, for instance, was filed against several defendants and two consented to partial judgments.
In none of them did a marker need to trade in a way that moved a public price. The mark did the work.
Sorting the fifteen records
The tag is broader than the conduct, and honesty about that is the useful part of this exercise.
Ten charge the person or firm that set the marks with fraud or deception, including the cases above and the Infinity Q adviser action, which alleges an inflated-NAV scheme from at least February 2017 to February 2021 (2023). Visium Asset Management settled an SEC order finding that two of its portfolio managers used sham broker quotes to inflate a credit fund’s NAV by roughly 2.4% to 7.2% and about $3.15 million in fees, without admitting or denying it (2018). The library also holds the SEC’s parallel matter against the second manager and a CFTC complaint against a natural gas head trader. One entry is a looser fit: the 2013 Kevin Cassidy record is tagged because the CFTC’s release describes a bank trader’s mis-marking of a natural gas options book and the fabrication of supposedly independent broker quotes sent to the bank’s back office. Cassidy was charged over the quotes, not the marks (2013).
Five are about controls, records or pricing rather than the marker’s intent.
- Citigroup was ordered over books and records and failure to supervise after three traders on different desks mismarked illiquid positions. The order records that the firm found the problems and reported them (2018).
- Natixis was charged by the CFTC with failing to supervise valuation on two desks. One desk hid profit and later released it in what the CFTC calls smoothing, which means mismarking can also run downward.
- Semper Capital’s order finds that reliance on vendor marks for small bond lots overstated a mutual fund’s NAV, with incomplete disclosure. It does not describe deliberate marking (2020).
- The Infinity Q mutual fund was charged under the fund pricing rule, and its former chief risk officer with alleged negligent misrepresentations about the independence of the pricing service (fund, officer).
These are legitimately part of the story, because a mark only survives if a check fails. But they should not be read as findings that those firms mismarked deliberately, and this site tags them for what regulators charged.
The count by year is below. It shows only what this library holds; it says nothing about how often mismarking happens.
The opposite end: what JPMorgan was actually found to have done
The London Whale episode is the usual example given for mismarking, and this library’s record for the CFTC’s 2013 order once carried the tag. The order itself does not support that reading, and the record is now filed under price manipulation.
The CFTC found that on 29 February 2012 JPMorgan, through traders in its Chief Investment Office, recklessly employed manipulative devices in connection with swaps, in violation of section 6(c)(1) of the Commodity Exchange Act and Regulation 180.1. The device was a large volume of real sales of one credit index in a concentrated period just before the month-end price testing of the desk’s marks. JPMorgan admitted the specified factual findings, including that its traders acted recklessly, and paid a $100 million civil penalty (CFTC press release 6737-13, record).
The order does discuss marks, and that is what makes the confusion understandable. It describes how the portfolio was marked, how month-end testing worked, and how the traders knew a large gap between their marks and market prices would invite questions. It also records, in a footnote, that two former traders had been accused in a criminal case and an SEC action of mismarking to deceive others at the bank. What it charged, though, was the selling.
I could not confirm from the documents held here how those separate proceedings ended, so the page does not say.
There is a real lesson in the contrast. In the JPMorgan order, the trading was aimed at a real price, so that a mark would look better. In the mismarking cases proper, the trading is absent and the mark is the whole thing. The first is a market-integrity case that happens to be motivated by valuation; the second is a fraud on the people who read the figure.
Two things called mismarking
Securities law has a second use of the word. Regulation SHO requires a broker or dealer to mark each equity sell order as long, short or short exempt, and it says an order may be marked long only if the seller is treated as owning the security and it will be deliverable in time. Marking a short sale long is sometimes called mismarking too. That is about the status of an order; nothing in it concerns the value of an asset. Those cases are excluded from the mismarking tag here, so a reader searching for one will not find the other. The text of the rule is short.
What the record does and does not show
The library holds what regulators announced and what it has collected. Fifteen records is a count of records, not a measure of prevalence. Several money fields are mechanically extracted and can be incomplete. Outcomes for matters recorded as filed, such as the CFTC’s complaint against a natural gas head trader (2019), are not stated here. No mismarking record in the library is dated after 2023, which may reflect what was collected rather than what happened.
For the definition, the law, detection and red flags, see the mismarking technique page. Its close neighbours are ETF and NAV abuse, where a wrong valuation is exploited by someone else, and marking the close, where a real price is moved to change what a position looks worth.