Three traders from Nomura Securities International, Inc. went on trial in early May 2017 for overcharging client in trades involving residential mortgage backed securities or RMBS. The U.S. Attorney’s Office for the District of Connecticut claims the traders lied when executing trades during the period 2009 to 2013 at the registered broker-dealer subsidiary of the Japanese firm. Now the SEC claims that two Nomura traders who were co-heads of the firm’s commercial mortgage backed securities or CMBS desk lied to clients during the period 2010 to 2014 when executing trades to fraudulently increase the commissions. SEC v. Im, Civil Action No. 1:17-cv-03613 (S.D.N.Y. Filed May 15, 2017); SEC v. Chan, Civil Action No. 1:17-cv-03605 (S.D.N.Y. Filed May 15, 2017).
James Im and Kee Chan were registered representatives at the securities firm. Each was a co-head of the CMBS trading desk. Each held the title of Managing Director, Fixed Income, Securitized Products Trading, Americas. Each is charged with violations of Securities Act Section 17(a) and Exchange Act Section 10(b).
Defendants Im and Chan ran the CMBS trading desk from 2009 until Mr. Chan departed in 2012, after which Mr. Im continued to run the desk through 2014. CMBS are debt obligations that are illiquid. Following the financial crisis the prices for the securities were significantly discounted. Beginning in 2010 prices improved with the economy. The secondary market for the securities is opaque. There is no contemporaneous public dissemination of trade prices. Purchasers and sellers had no reliable way to discern the prices paid by dealers such as Nomura except for disclosures made by the traders.
Nomura customers who dealt in CMBS were typically investment advisers and other firms that managed funds. Typically the two Nomura traders intermediated trades between buyers and sellers. The firm would buy from one customer for its account and then sell the same security to another client. Profit came from the spread or the difference between Nomura’s buy and sell price. Since the securities firm typically only held the instrument for a very brief time the transactions had very little risk.
During the trade negotiations the two traders frequently told one or both counterparties the other customer’s bid to buy or offer to sell the security, the prices at which Nomura bought or sold the bond, and/or the spread or commission that would be realized. The traders’ goal was to maximize the spread. The customers generally sought to engage in the transaction at the best price while giving Nomura a reasonable spread or commission for intermediating the trade. At times a buyer would compensate the firm by adding “on top” of the price and when selling would agree to compensate the firm by selling at a price below that which the firm was able to sell at to the potential buyer. Trades were frequently done through electronic communications such as instant message or Bloomberg chats. Since the markets were opaque clients informed their decisions based on information furnished by the two traders.
In numerous instances, beginning in 2010 and continuing through their time with the firm, the two traders lied to customers about bids and offers made or received for the securities involved in transactions. The two men misrepresented in numerous instances the prices paid by Nomura or received by the firm. The two men frequently induced customers buying securities to increase their bids and pay more that would otherwise have been required by telling them false information about Nomura’s acquisition cost. Likewise, the traders frequently induced customers selling securities to the firm to lower their bid or sales price by giving the customer false information. All of these actions, along with others, inflated the spread, yielding hundreds of thousands of dollars in additional, fraudulent profit for the CMBS desk.
Mr. Chan resolve the charges with the Commission. He agreed to pay $51,965 in disgorgement along with prejudgment interest and a penalty of $150,000. He also consented to the entry of a bar from the securities business with the right to reapply after three years. The case as to Mr. Im is continuing.