Ex-RBS Debt Trader Pleads Guilty in Deepening Bond ProbeChristie Smythe, Jody Shenn and Tom Schoenberg
A former Royal Bank of Scotland Group Plc trader pleaded guilty to a fraud scheme in a new thread of the U.S. government’s probe of the securitized debt market.
Matthew Katke, who agreed to cooperate with prosecutors, pleaded guilty Wednesday to conspiracy to commit securities fraud for participating in a multimillion-dollar scheme to cheat customers who bought and sold bonds, U.S. Attorney Deirdre Daly in Connecticut said in a statement.
Katke traded collateralized loan obligations, securities backed by high-yield corporate debt. The charge against him sprung from his activities while at RBS in Stamford, Connecticut, where he worked before joining Nomura Holdings Inc. in 2013. He is no longer employed by Nomura, according to a person with knowledge of the matter who asked not to be identified because the decision wasn’t public.
The case reveals a new front for investigators looking to clean up markets for complex and often hard-to-value debt that helped cause the 2008 financial crisis. It shows how scrutiny is expanding past the mortgage-linked bonds at the heart of the meltdown and to CLOs, whose reputation largely escaped without the same taint.
Katke’s guilty plea follows a string of suspensions at Wall Street banks as regulators scrutinize transactions in debt backed by everything from mortgages to corporate loans.
Trading in mortgage bonds and other securitized debt has come under scrutiny of regulators after former Jefferies Group LLC trader Jesse Litvak was accused and later convicted of securities fraud for lying to clients.
Litvak appealed his March 2014 conviction for misrepresenting facts such as how much sellers were asking for mortgage securities or what customers would pay. His lawyer said in a November hearing that the conviction could be used to turn “garden-variety statements” made in all kinds of negotiations into the basis for charges. Katke’s agreement allows him to withdraw his plea if Litvak wins his appeal.
As part of the RBS scheme, Katke and his co-conspirators made misrepresentations to induce buying customers to pay inflated prices and sellers to accept deflated prices for bonds, prosecutors said.
“RBS has been cooperating and intends to continue to cooperate with the government with respect to this investigation,” Sarah Lukashok, a spokeswoman for the Edinburgh-based bank, said in an e-mail.
Richard Albert, a lawyer for Katke, declined to comment on the plea.
Katke agreed to cooperate fully with the government as the probe continues, and may be called to testify in grand jury proceedings or in any trials that may result from the investigation, according to a copy of his plea agreement provided by prosecutors.
While Katke faces as long as five years in prison, he may be eligible for a more lenient sentence if found to be helpful to the government, according to the agreement.
Katke pleaded guilty to one count of conspiracy to commit securities fraud, according to copies of court documents provided by prosecutors. He engaged in the scheme from about 2008 to June 2014, according to the documents.
Katke and co-conspirators agreed they would increase profits on bond trades by making false statements to customers, according to a copy of court documents provided by prosecutors. Katke and others misrepresented the prices RBS had paid to acquire a bond or what it was asking to sell it, they said. The group also misled customers about whether a bond came from RBS’s own inventory or a third party, according to prosecutors.
Adam Siegel, who headed securitized-debt trading at RBS, was placed on leave last year, people familiar with the matter said last April. He later left the bank, the U.K.’s largest government-owned lender, and joined investment firm Fortress Investment Group LLC in July. Siegel didn’t return two messages left on his mobile phone and an e-mail Wednesday.
Participants in the CLO market have tried to distance themselves from the blow up in the market for mortgage bonds and collateralized debt obligations, or CDOs, used to package home-loan securities into new notes.
Bram Smith, executive director of the Loan Syndications & Trading Association, wrote in an op-ed in The Hill in September that “there continues to be some confusion about CLOs -- misconceptions that we can only think come from a conflation with CDOs.”
CLOs pool high-yield corporate loans and slice them into securities of varying risk and return, typically with ratings from AAA down to B. The lowest unrated portion, known as the equity tranche, offers the highest potential returns and the greatest risk because investors are the first to see their payouts reduced when loans backing the CLO default.
CLO issuance rose to a record $123.6 billion in 2014, surpassing the previous high of $94 billion in 2006, according to JPMorgan Chase & Co. data. There has been $19.1 billion of deals raised in the U.S. this year as of March 6, according to the bank.
In contrast, issuance of bonds tied to new U.S. home loans without government backing totaled about $9 billion last year, according to data compiled by Bloomberg, compared with an annual peak of about $1.2 trillion before the financial crisis. Sales this year total about $3.5 billion.
Trading in many parts of the securitized-debt markets -- including both mortgage bonds and CLOs -- remains opaque even as regulators seek to expand transparency in the wake of the financial crisis that was fueled in part by the difficulty in determining the value of the debt.
The Financial Industry Regulatory Authority’s board in December authorized its staff to seek comment on a plan to expand the industry-funded watchdog’s dissemination of transaction data to more types of securitized debt.
While Finra already is set to bring asset-backed securities tied to several asset types into its Trace system in a way that mimics the robust disclosures available for corporate bonds, the proposal for debt including home-loan securities without government backing and CDOs would be more limited. Trace would offer only real-time, trade-by-trade information with transaction sizes of less than $1 million.
Katke, who played soccer in college for Washington University in St. Louis, joined Nomura in August 2013 after leaving RBS three months earlier, according to Finra records. He was among 15 former Bear Stearns Cos. employees to leave for RBS in 2008 after JPMorgan agreed to buy the investment bank as it neared collapse.
The case is U.S. v. Katke, 3:15-cr-00038, U.S. District Court, District of Connecticut.