SEC Charges Three RMBS Traders With Lying To Clients

The SEC and the U.S. Attorney’s Office for the District of Connecticut charged three senior traders with fraud by misrepresenting pricing information to clients regarding securities traded in opaque markets. In those markets clients often rely on the trader for pricing information since it is not readily available. SEC v. Shapiro, Civil Action No. 1:15-cv-07045 (S.D.N.Y. Filed September 8, 2015). See Lit. Rel. No. 2334 (September 8, 2015).

Ross Shapiro, Michael Gramins and Tyler Peters joined Nomura Securities International, Inc. in August 2009. Mr. Shapiro served as head trader on Nomura’s RMBS desk in New York City and held the position of Managing Director, Fixed Income, Securitized Products Trading, America. Mr. Gramins held the position of Executive Director, Fixed Income, Americas. He was a senior trader on the New York City RMBS desk. Mr. Peters held the position of Executive Director, Fixed Income, Americas. He was also a senior trader on the New York City RMBS desk. Nomura is a registered broker dealer which is the U.S. affiliate of Nomura Holdings, Inc., a Japanese financial holding company based in Tokyo, Japan.

The three defendants had previously worked together at another New York broker. Prices for RMBS, and MHABS – a similar product, are typically expressed as a percentage of its par value. Many of those traded at Nomura had been discounted significantly since the financial crisis. Brokers such as Nomura are under no obligation to provide information to customers in connection with their negotiations to purchase and sell RMBS.

Nomura’s customers were funds that invested n RMBS. The market operates through relationships between customers who buy and sell the securities. Customers seek to pay the lowest price and get the highest price on sales. Since the market for these securities is opaque – there is no exchange and determining the market price can be difficult — customers often seek pricing information from the brokers. It is not unusual for a customer’s view of the current market price for a security to come primarily from the broker.

The defendants arranged trades between customers. During that process they furnished those customers with market information. To execute a transaction Messrs. Shapiro, Gramins and Peters arranged trades between buyers and sellers, acting essentially as the middle man. In arranging these trades the firm would profit from the spread. That spread was often negotiated with the buyer or seller. During the process Nomura would briefly own the security.

For a period of about three years beginning in January 2010 Messrs. Shapiro, Gramins and Peters lied to customers about the price paid by Nomura for the security or the price it was going to pay. This permitted them to negotiate a higher price to the customers. In many cases the misrepresentations were made in electronic communications such as instant messages, emails and online chats. They also instructed junior traders to utilize this practice. By engaging in these practices the three defendants generated over $7 million in additional revenue for the firm.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.