- U.S. issues 10-count indictment against former Nomura traders
- RMBS traders trained colleagues to mislead clients, U.S. Says
Three former Nomura Holdings Inc. traders were charged with defrauding investors by inflating the prices of mortgage-backed securities, the latest cases to come out of a U.S. crackdown on deceptive sales practices in the market for complex bonds.
Ross Shapiro, Michael Gramins and Tyler Peters were charged in a 10-count indictment made public Tuesday in federal court in Connecticut. The three, who supervised the residential mortgage-backed securities desk at a Nomura unit in New York, were also sued by the U.S. Securities and Exchange Commission in a related case.
The traders made money by purchasing bonds and then selling them at higher prices, pocketing the spread. To increase the spread, the three lied about how much they had paid for debt, generating more than $7 million in additional revenue for Nomura, according to the SEC. Victims of the practice included an investment fund in New York and a Troubled Asset Relief Program fund manager, among others, according to the indictment.
Filing criminal charges represents the government’s most aggressive effort yet to police trading of bonds tied to mortgages and corporate loans that aren’t bought and sold on transparent exchanges. Because pricing data is scarce for such debt, investors often have to rely on brokers to provide valuations.
The Justice Department and the SEC have been working on as many as 10 cases involving infractions such as bankers misleading their clients, two people familiar with the matter told Bloomberg News last month.
The government is pursuing additional cases even though the first major conviction stemming from the multi-year probe faces a legal challenge.
In July 2014, former Jefferies Group LLC trader Jesse Litvak was sentenced to two years in prison for bilking customers out of $2 million by lying about how much he had paid for bonds and committing other violations. Litvak’s lawyers have argued that it didn’t matter that he misrepresented the markup as long as his sophisticated buyers -- consisting of hedge funds and money managers -- paid what they felt was an appropriate price.
In May, an appellate judge questioned the arguments used against Litvak, whose case has been used as a precedent in the government’s pursuit of other traders. A three-judge panel is expected to make a decision on his appeal in the coming months.
Shapiro, 41, Gramins, 33, and Peters, 32, were paid $13.3 million, $5.8 million and $2.9 million, respectively, from January 2011 to November 2013, the period during which the misconduct took place, according to the SEC. The indictment alleges the conspiracy began as far back as 2009.
The three traders allegedly trained their employees to mislead customers as part of the plot. One trader told a salesperson that he “lied” about the price of a bond to customer and then “marked up 2 pts,” according to the indictment. The salesperson responded, “haha sick . . . well played,” the U.S. said.
The traders also made up “phantom” sellers, which hid the fact that bonds were actually owned by Nomura, the SEC said. The deception was used to mislead clients about the prices being demanded for debt, according to the SEC.
The three are scheduled to make their first court appearance on Thursday. If found guilty, they face up to 20 years in prison on each of the nine fraud charges and up to five years in prison on the conspiracy charge.
Brett Jaffe, an attorney for Peters, and Guy Petrillo, who’s representing Shapiro, both said their clients would be pleading not guilty. Marc Mukasey, an attorney for Gramins, didn’t return a request for comment.