Hedge-fund powerhouse Two Sigma is likely to pay as much as $100 million to settle a Securities and Exchange Commission investigation into a trading scandal at the firm. The New York firm would likely face blame for how it oversaw an ex-employee at the center of the misconduct, according to people close to the matter. The episode led to hundreds of millions of dollars in losses and gains after the researcher allegedly adjusted trading models without authorization. Two Sigma is still negotiating with the regulator and could pay a lower amount as a result of the talks, which are at an advanced stage, the people said. The five-member commission would have to approve any final settlement. A spokeswoman for the firm and an SEC spokesman declined to comment. The quant-trading firm’s co-founders, John Overdeck and David Siegel, said in August that they were stepping down as co-chief executives following a yearslong clash that has distracted executives and captured attention in the hedge-fund business. Last year, Two Sigma said Overdeck and Siegel’s squabbles made it difficult for the firm to make key decisions. Last month, Scott Hoffman and Carter Lyons took over as Two Sigma’s new co-chief executives. Overdeck and Siegel will remain as co-chairmen, the firm said. The SEC’s investigation relates to a senior researcher’s alleged unauthorized adjustment of the hedge fund’s investing models. The move led to losses in some funds and big gains in others. The Wall Street Journal first reported the alleged trading scandal last year and that the SEC was looking into the matter. The researcher, Jian Wu, a senior vice president who joined Two Sigma in 2018, was trying to boost his compensation, the firm told clients last year, without identifying Wu. He made changes that led to gains of $450 million in total for some Two Sigma funds—including those in which the firm’s own executives and employees invest, as well as those available to clients, the people said. But they also led to a total of $170 million in losses for other funds compared with how they otherwise would have fared—losses largely borne by clients. Two Sigma, which has $60 billion under management, has made investors whole. Two Sigma let Wu go. He sued the firm for defamation in New York state court. Filings in the case are sealed. The SEC’s enforcement investigation has focused on Wu’s conduct. It couldn’t be learned whether the agency plans to sue him or seek a settlement to resolve the allegations, the people said. The SEC has sought higher fines under the Biden administration to resolve enforcement investigations. The agency’s leaders have said that past settlements weren’t tough enough to deter wrongdoing in the industry. Wu received a Ph.D. in operations research from Cornell University in 2017, according to his LinkedIn profile. In 2011, he received a bachelor of engineering degree from Beijing’s Tsinghua University. The Journal has previously reported that the SEC also has been looking into the discord between Overdeck and Siegel and how it might affect the firm. https://www.wsj.com/finance/investi...ment-talks-with-sec-5c7a1183?mod=hp_lead_pos5
Reminds me Enron, the infamous American energy company that collapsed in 2001 due to a massive accounting fraud scandal. One of the key aspects of the Enron scandal was the company's practice of transferring losses to special purpose entities (SPEs), which allowed them to hide their financial problems and make the company appear more profitable than it actually was.