Lies Traders Tell: A New Trial, a New Worry in Mortgage-Bond Circlesby and
Traders grew anxious as prosecutors ramped up investigation
Evidence in latest case involving Nomura trio set for Monday
In the stock market, the tape never lies.
In the bond market, sometimes traders do.
That’s the message federal authorities have been sending for years as they’ve targeted dubious practices on Wall Street bond desks.
The hot topic lately: prices. What happens when traders quote different prices to different buyers -- or fudge when asked what they themselves paid? One trader, Jesse Litvak, was sentenced to prison last month for lying to clients. Three others facing similar charges are on trial in a separate case ramping up on Monday.
The conviction of Litvak, a former managing director at Jefferies LLC, is still reverberating through the bond world. But, increasingly, authorities’ efforts are having an unexpected effect: rather than dragging traders into the sunlight, it’s driving many of them deeper into the shadows.
More and more, traders are reluctant to do business over office phone lines, email and chats that leave a trail for bosses and authorities. Instead, many are resorting to messaging apps that technically are a no-no on Wall Street. Still others are reluctant to discuss the prices they’re paying for bonds, for fear of getting caught in what might look like a lie.
For obvious reasons, few traders are willing to talk openly about the subject. Privately, many say the the prosecutions are taking a toll. Getting trades done is getting tougher, at least in some corners of the bond markets. Liquidity has dried up a bit.
Traders "have become afraid to say anything, and so they say nothing,” said Buck Burnaman, chief risk officer at Dendera Capital in New York, who testified on Litvak’s behalf.
Federal prosecutors have said the Litvak prosecution, and others like it, are making the bond market safer for ordinary investors. Traders aren’t so sure. A lot of give-and-take goes into trading debt securities such as mortgage bonds and complex structured products, which tend to change hands in bespoke deals. Often, prices are whatever traders say they are.
Which is why some traders are effectively going underground. They’re resorting to encrypted texting services like Whatsapp and old-fashioned face-to-face meetings to share market chatter with preferred clients. Some use the abbreviation LDL, or Let’s Discuss Live, to set up such meetings.
“You’d never believe how much information is shared these days at broker dinners,” said one trader who recently retired.
What’s more, many worry that today’s conversations might be used against them later if authorities were to change the rules.
“This cat-and-mouse dynamic will probably be with us for as long as we regulate finance,” said Robert C. Hockett, a law professor at Cornell Law School. Every time authorities crack down or try to improve market transparency, some traders will search out additional, opaque channels, he said.
Many of these issues will come to the fore again Monday in Hartford, Connecticut when prosecutors begin presenting evidence against former traders at Nomura Holdings Inc.: Ross Shapiro, Michael Gramins and Tyler Peters. All three pleaded not guilty to charges of conspiracy and fraud. The indictment, the men say in court filings, makes no claim they sold bad investments to anyone.
Jennifer Will, a Nomura spokeswoman, declined to comment. Lawyers for the traders declined to comment or didn’t return calls.
For the Nomura three, the best strategy may be to take the stand, which is something Litvak didn’t do, said David Bissinger, a Houston lawyer who represents traders and securities professionals. The Nomura traders might be able to explain that in bond trading, buyers and sellers dance. Often, a trader’s speed and ability to transact business helps determine the price a buyer is willing to pay.
Court records show Nomura told its employees not to fib to customers shortly after Litvak was indicted in January 2013 and later held a trading desk “huddle” on the issue. Prosecutors contend the lies continued. Filings show prosecutors reviewed 800 trades and found 180 were fraudulent. They plan to present evidence of at least 20 of these trades during the trial.
Caleb Chao, a junior trader who left Nomura in 2016, may testify that he observed Gramins making misrepresentations over the phone, according to court records. Prosecutors are expected to call other witnesses with direct knowledge about of the Nomura traders’ tactics.
Chao’s lawyer, Catherine Redlich, declined to comment.
One thing seems sure: After the Litvak case, bond traders everywhere will have a hard time arguing they don’t know that fudging prices crosses the line.
“That makes it a very difficult proposition for a defendant to claim not to have realized that this sort of behavior is wrongful,” said Hockett of Cornell Law.