Commodities Trader Sentenced for Hiding $200M Losses, Spurring Trammo's Collapse

A former commodities trader in Houston was sentenced to three years in prison for concealing hundreds of millions of dollars in trading losses to secure a large bonus. David Smothermon, 55, admitted to manipulating his company's accounting systems to hide the losses from his employer according to reports. The sentence was delivered by U.S. District Judge Alvin Hellerstein in New York.

Smothermon worked as an executive at Trammo AG, a New York-based firm that traded physical chemical supplies, including ammonia, sulfur, and nitric acid. He had joined the company in 2005 and led a Houston-based subsidiary that specialized in liquefied petroleum gas (LPG) and related financial derivatives according to reports.

The case centered on Smothermon's use of questionable accounting methods to mask the extent of his trading losses. Prosecutors said he instructed employees to make false entries in the company's books to hide over $200 million in losses—nearly two-thirds of Trammo's net worth according to prosecutors.

How the Scheme Unfolded

Smothermon's legal team argued that he had been a high-performing trader who earned a $14.5 million bonus in 2015 after generating more than $63 million in profits for the company. But as his trades began to lose money in 2016, his mental health deteriorated, and he resorted to deception to maintain his financial rewards according to reports.

One example cited by prosecutors involved Smothermon instructing an employee to alter a contract for the purchase of liquefied petroleum gas to make it appear as though the company had the right to buy twice as much as actually agreed. This manipulation effectively doubled the deal's apparent profitability according to prosecutors.

By the end of 2016, Smothermon had resigned amid growing scrutiny from Trammo's leadership. The company's chief financial officer had already raised concerns about discrepancies in the accounting system and warned that a review was being planned according to internal reports.

The Fallout for Trammo

The losses Smothermon concealed eventually forced Trammo to sell its trading positions and realize significant losses. The company was forced to downsize and laid off hundreds of employees according to company statements. Trammo stated that Smothermon's actions put the company's survival at risk, triggering margin calls and defaults under credit agreements according to the company.

In a victim impact statement, Trammo said it had to spend $58 million on restructuring costs and shut down operations globally, cutting more than 70% of its workforce according to the company. The company urged the court to ensure Smothermon repays the money he owes in restitution and requested a sentence that would help recover the losses.

Prosecutors had initially asked for a four-year prison term, arguing that Smothermon's position of trust made his actions especially egregious. Smothermon, however, had requested five years of probation, including 10 months of home confinement, citing his caregiving responsibilities for his wife, who has lymphoma, and his adult son with cerebral palsy according to court records.

Smothermon pleaded guilty to a single count of wire fraud, which carries a maximum sentence of 20 years in prison. The final sentence of three years was considered a compromise between the defense and prosecution according to court documents.

What This Means for Financial Sector Oversight

The case highlights growing scrutiny of accounting practices in the commodities trading sector. Federal prosecutors in Manhattan have pursued multiple cases involving "mismarking," where traders use dubious methods to inflate asset values or hide losses according to federal prosecutors. The Smothermon case is a warning to executives that financial misconduct will be met with severe legal consequences, especially for those in positions of trust and authority.

The sentencing also underscores the ongoing risks associated with aggressive trading and the pressure to meet performance expectations in volatile markets. Smothermon's actions, while extreme, reflect the high stakes and intense competition within the commodities space. Analysts have said the case could prompt further regulatory reviews of trading practices and financial disclosures across the industry.

As markets continue to adjust to the fallout, investors and companies alike are likely to remain vigilant. The case serves as a cautionary tale about the consequences of financial deception and the importance of robust internal controls.