One Nomura Trader Convicted, One Cleared at Bond Fraud Trial

Updated on
  • Third trader faces possible retrial as U.S. weighs options
  • Ex-trader Gramins is found guilty while Peters is acquitted

A former Nomura Holdings Inc. trader was found guilty of conspiring to lie to clients about mortgage-bond prices, while another was cleared of all charges in a verdict that highlights the challenge of policing fraud in the market.

Michael Gramins was convicted of conspiracy and cleared of six fraud counts, while the jury was hung on two other charges. Tyler Peters was acquitted of all nine charges. Jurors cleared a third trader, Ross Shapiro, of eight counts of fraud, but deadlocked on one conspiracy count. Prosecutors must decide whether to retry Shapiro and Gramins on the unresolved counts.

Thursday’s mixed verdict in Hartford, Connecticut supports the government’s claim that lying to even the most-sophisticated customers can amount to securities fraud -- a widespread practice among bond traders until prosecutors launched their crackdown 4 1/2 years ago. But the outcome also underscores how difficult it is for prosecutors to prove their case.

“I don’t think it undermines the strategy as a matter of law, but it might at least suggest the government will want to assemble a really compelling cache of evidence," said Robert C. Hockett, a professor at Cornell Law School in Ithaca, New York. Prosecutors need "a very compelling bunch of testifiers, emails, text messages and recordings or what have you,” he said.

In January, jurors convicted Jesse Litvak, a former Jefferies LLC managing director, of lying about prices, although he was found guilty on just one of 10 counts. Since his indictment in 2013, another half-dozen traders have been charged and dozens more have left their jobs. Litvak, who is appealing, was sentenced to two years behind bars. Gramins faces a maximum sentence of five years in prison.

‘That’s What I Did’ Is Traders’ Worry as Bond Trials Play Out

Defense lawyers didn’t have immediate comments after the verdict, and jurors weren’t available to speak. Jennifer Will, a Nomura spokeswoman, declined to comment.

“This has been a demanding prosecution,” U.S. Attorney for Connecticut, Deirdre M. Daly, said following the verdict. The investigation “has had a marked impact on the industry and will continue,” she said.

The conspiracy conviction for Gramins may have turned on internal Nomura recordings that prosecutors played in court. In one, jurors heard Gramins discuss what to say to a client who he and others allegedly defrauded. Prosecutors didn’t play any recordings of Shapiro or Peters.

"The jurors were willing to convict on the one count that does not require proof of a specific violation, but instead just an agreement to engage in misconduct," said Peter J. Henning, a professor at Wayne State University Law School in Detroit.

Lawyers for Peters, who was acquitted, argued that he was a junior trader who was trained by his supervisors to mislead clients. Lawyers for Shapiro, a supervisor at Nomura, presented evidence that he warned traders on his desk not to lie after Litvak’s arrest.

The government crackdown has largely focused on the roughly $10 trillion U.S. structured finance market where bonds fund everything from mortgages on homes, skyscrapers and office parks to loans propping up distressed companies. Criminal and civil cases are still reverberating through the industry.

Several have agreed to cooperate with prosecutors in bids for leniency, including former Royal Bank of Scotland Group Plc traders Adam Siegel and Matthew Katke and ex-Nomura vice president Frank DiNucci Jr. A former Cantor Fitzgerald & Co. trader, David Demos, was arrested in December and is scheduled to go to trial in April.

In May, the Securities and Exchange Commission sued two traders who had previously worked at Nomura, alleging they, too, had lied to clients about bond prices to inflate profits and boost their compensation. This case involved commercial mortgage bonds.

Banks and brokerage firms have taken note of the added scrutiny. Nomura held specific training for its bond traders, including a slide that said "do not lie," according to evidence at the trial.

Some claim the scrutiny has pushed questionable sales tactics farther into the shadows, saying traders have become reluctant to do business over office phone lines, email and chats that leave a trail for bosses and authorities. Some are looking back at archived negotiations to reassess their behavior. Many are resorting to encrypted messaging apps or personal cell phones.

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At the trial, prosecutors said the trio ran a scheme from roughly 2009 to 2014 to raise their compensation. The prosecutors called some of the alleged victims to testify that their decision to buy or sell was influenced by what the defendants had told them. Three former junior traders told jurors they lied to customers using tactics taught by the defendants.

The government claims the three men continued to engage in the shady practices even after Litvak was indicted and they were warned by Nomura compliance officials not to engage in similar behavior.

“It was just commonplace on the desk,” DiNucci, who worked at Nomura from 2009 to 2012, testified.

The defendants didn’t testify or offer any witnesses. Instead, their attorneys attempted to discredit government witnesses and elicit testimony that helped them.

DiNucci was portrayed as a serial liar and criminal who stole money from his mother and continued to engage in questionable behavior even after leaving Nomura and agreeing to cooperate. His testimony revealed details of a separate investigation into the practice, known as mismarking, that grew out of the crackdown on shady trading practices.

Defense attorneys also got one of the alleged victims, Putnam Investments portfolio manager Zachary Harrison, to admit under cross-examination that he lied during negotiations and was fired from his own firm for engaging in questionable trading practices.

"I may make the choice of lying to that person if I thought it was protecting my clients’ interest," Harrison told jurors.

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