Nomura's Phone Taping Failed to Halt Bond Lies, U.S. Alleges

Updated on
  • Executive testifies tapes made to comply with regulations
  • Testimony came in trial of 3 ex-traders charged with fraud

Shortly after an ex-Jefferies LLC mortgage-bond trader was indicted for lying to customers in 2013, Nomura Holdings Inc. started recording the telephone calls of its employees.

The increased scrutiny included Nomura’s mortgage-bond traders, who were also given a handout telling them “do not lie” in the wake of the arrest of Jesse Litvak, the former Jefferies trader who was sentenced last month to two years in prison for fraud. Those steps didn’t rein in at least three former traders at Nomura, prosecutors said.

Ross Shapiro, Michael Gramins and Tyler Peters are on trial in Hartford, Connecticut, charged with misrepresenting the prices of securities to Nomura’s clients and training junior traders to do the same during an alleged conspiracy that prosecutors say lasted for almost four years. They are among more than a half-dozen traders charged with lying to customers about prices since Litvak’s arrest in January 2013.

Jonathan Raiff, head of global markets for the Americas at Nomura, testified that he recalled reading excerpts from Litvak’s chats in news reports and attending the compliance session where employees were urged not to lie.

“The general focus of the session was, ‘If you say something, make sure it’s accurate,”’ Raiff said. “All communications with clients were supposed to be accurate, whether it be negotiating a bond or whatever the communication may be.”

Ex-Nomura Traders on Trial as Part of U.S. Crackdown: Scorecard

Nomura was required to record the phone lines of anyone involved in derivative transactions when it registered Nomura Global Financial Products Inc. as a swap dealer with the U.S. Commodity Futures Trading Commission, Raiff said. The firm was already keeping communications, such as electronic chats, and reviewed a sampling of emails to make sure traders were complying with regulators, Raiff said.

The phone recordings weren’t actively monitored, he said, but some were saved in case they were needed due to a dispute with clients or a request from regulators.

“We had a debate about whether we should just tape the people involved,” Raiff said. “The decision was made to just tape everyone.”

The crackdown on dubious bond trading has prompted changes in communications -- away from the phone, email and electronic chats. Some shifted to encrypted texting services such as WhatsApp, while others use the abbreviation LDL, or Let’s Discuss Live, to set up face-to-face meetings.

Compliance Session

Raiff downplayed the effect of the Litvak indictment when asked on cross-examination if it reverberated through the industry “like a bombshell,” saying that he was trading different securities at the time, “so it didn’t have the same kind of impact for me.”

But he admitted that before the Litvak indictment, nobody had been prosecuted in the more than 20 years since residential mortgage-backed securities started trading in the mid-1980s for making misrepresentations about costs in negotiations. Nomura held the compliance session a week after the indictment.

Defense attorneys for the three ex-Nomura traders have argued that the tactics in the industry were widespread before Litvak was charged and that traders were unaware that they could face criminal prosecution for comments they made in negotiations with large, sophisticated counterparties until he was indicted.

“I recall that people were obviously surprised,” Raiff said in response to a question about whether people were “freaking out” about the indictment. “I was the boss. It would have been unwise for people to freak out to me. It was a topic of conversation people were talking about.”

— With assistance by Matt Scully

(Updates with testimony starting in 10th paragraph.)
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