Defending Nomura Trio Means Showing How Bond Trading WorksBy
Former brokers are on trial for defrauding their customers
Lawyers poised to cross-examine ex-Putnam investment manager
Even before lawyers for three former Nomura Holdings Inc. mortgage-bond traders call the first defense witness, their strategy for winning an acquittal at a fraud trial has started to emerge.
The traders’ customers got the "best available price” for the bonds they wanted, defense attorney Guy Petrillo told jurors in opening statements last week. "No one was bamboozled or snookered.”
Marc Mukasey, another defense lawyer, said his client was negotiating with "the most sophisticated investment funds in the world.”
As for Frank DiNucci Jr., an ex-Nomura trader who pleaded guilty and testified for the government about pervasive misinformation about bond prices, defense lawyers have called him a serial liar who deceived prosecutors, FBI agents, industry regulators and even his own mother.
Former traders Ross Shapiro, Michael Gramins and Tyler Peters are on trial in Hartford, Connecticut, charged with defrauding clients from 2009 to 2013. Their lawyers are pursuing at least two avenues of attack, one distinctive to the asset-backed securities business and one common to most criminal cases.
They’re portraying mortgage-bond trading as a market where skilled and educated parties backed by exhaustive research grapple to win the best prices for their customers, and where both sides are wary in negotiations.
"These guys would not pull the trigger to buy or sell a bond until they gathered an ocean of information about the bonds that was reliable and that was verifiable and that told them the price is right,” Mukasey said.
They’re also employing the age-old tactic of discrediting the prosecution’s witnesses, casting them as perjurers who are seeking to stay out of prison by cooperating with prosecutors and falsely casting blame on the defendants.
The three ex-traders deny wrongdoing. A former Putnam Investments LLC portfolio manager returned to the witness stand on Tuesday, as prosecutors argue that the traders’ misrepresentations were important enough to sway clients. Putnam was involved in 11 of the 20 trades where the defendants are accused of lying, and Zachary Harrison was the only representative to deal with them on those trades.
In painstaking detail, Harrison last week explained transcripts of electronic chats recording negotiations between him and the traders. He told jurors that he relied on pricing information he was given while weighing it against other market information and his own research.
"Trades didn’t happen unless both sides were happy with the price?" Petrillo asked Tuesday.
"A trade wouldn’t happen unless both sides were ready to trade at that level," Harrison replied.
Defense attorneys had hinted at how they plan to attack Harrison, noting in court papers that he too was investigated for trading abuses. Harrison testified that he was fired from Putnam last year.
Harrison used code words to prearrange trades, a practice known as “parking,” according to court documents. On the stand, he denied doing that or that his tactics were improper.
Jon Goldstein, a spokesman for Putnam, declined to comment on Harrison’s testimony.
The defense also wants jurors to understand the sophistication of the mortgage-bond market. While they acknowledge that their clients made misrepresentations, they argue that no one was misled and nobody in the industry thought the tactics were illegal until 2013, when former Jefferies LLC trader Jesse Litvak was arrested for lying to customers.
Last week, under cross-examination by the defense, Jonathan Raiff, head of global markets for the Americas at Nomura, testified that until Litvak’s arrest nobody in the 20-plus years since mortgage-backed securities were created had ever been prosecuted for lying in negotiations.
The defense has adopted much of the strategy Litvak’s lawyers used. He was acquitted on nine of 10 counts in January, with the one guilty finding seemingly linked to altering a chat transcript.
Still, Litvak was sentenced last month to two years behind bars -- the same term he got at his first trial when he was convicted of 15 counts.
His first conviction was overturned because the judge hadn’t allowed his defense to present expert testimony that bond traders are sophisticated professionals and likely to be skeptical about statements made about pricing during negotiations.
Litvak’s arrest in 2013 marked the start of a crackdown that has resulted in charges against more than a half-dozen others. On Monday, the push continued. U.S. regulators sued two other ex-Nomura traders who ran a commercial mortgage-backed securities desk for allegedly lying to clients about prices to inflate the bank’s profits and boost their compensation.
— With assistance by Charles Stein, and Matt Robinson
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