Trading in Opaque Markets: Fraud, Materiality and Compliance

by Dorsey & Whitney LLP
Contact

This is the final segment of an occasional series regarding a group of criminal and civil securities fraud actions involving trading in opaque markets and the lessons that can be drawn the prosecutions; segment one is here, two here and three here.

The Shapiro trial

The Shapiro trial began in May 2017; it concluded in early June. Testimony in the case was presented by ten government witnesses, primarily the counterparties or employees of Nomura.

During cross-examination the defense sought to develop testimony reflecting the points presented by the expert witness in Litvak. The testimony included the following:

• Frank DiNucci, a government cooperator who pleaded guilty to conspiracy in the case testified he repeatedly used the same sales tactics as the defendants because he thought they were legal

• Caleb Chao, a co-worker of Mr. Peters testified that in view of his supervisor’s approval he believed the tactics he used, which were like those of the defendants, were appropriate

• Alejandro Feely, another Nomura employee, testified that while he was uncomfortable with the trading tactics, he never thought they were illegal

Other witnesses presented similar testimony, emphasizing that: the trading tactics were never concealed; Nomura’s compliance and legal department never reprimanded any member of the RMBS team for the trading tactics; and until Litvak the only consequence of such tactics was the possible loss of business from a counterparty.

The requests to charge by the defendants were modified after Litvak to conform to those used in that case. On June 15, 2017, following a week of deliberations, the jury returned verdicts of largely not guilty except:

• Mr Gramins was found guilty of conspiracy

• The jury did not reach verdicts on three counts: one for conspiracy as to Mr. Shapiro and one each for securities and wire fraud as to Mr. Gramins.

Post trial motions are in briefing. The SEC’s parallel case is pending.

Im & Chan

Prior to the verdict in Shapiro, the SEC filed an action against Nomura traders James Im and Kee Chan. SEC v. Im, Civil Action No. 1:16-cv-0313 (S.D.N.Y. Filed May 17, 2017). The Commission’s complaint centers on trading in commercial mortgage backed securities or CMBS.

The allegations are substantially similar to those in Shapiro. It alleges that the defendants deliberately misled and lied to customers about:

• The prices Nomura bought or sold the securities

• The bids Nomura made or received

• The compensation the firm obtained for acting as an intermediary (the spread)

• Who owned the securities

Essentially the same pattern was repeated for each trade: 1) The potential buyer would be told the bond could only be secured at a higher price than was actually quoted; and 2) The potential buyer then increased the amount to be paid, increasing the spread for the firm. The pattern reversed for sales.

The SEC’s complaint alleged that the representations by the traders were material to the counterparties. Since the markets were opaque, counterparties relied on the trader for pricing information. Ultimately the misrepresentations generated hundreds of thousands of dollars in ill-gotten profits. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

Mr. Chan settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the provisions cited in the complaint. He also agreed to pay disgorgement of $51,985, prejudgment interest and a penalty of $150,000. In a related administrative proceeding Mr. Chan was barred from the securities business with a right to apply for re-entry after three years. See Lit. Rel. No. 23848 (May 26, 2017).

Mr. Im is litigating the case. Recently he filed a motion to dismiss, presenting essentially the same type of arguments used by the defense in Litvak. The U.S. Attorney’s Office did not bring a parallel criminal action.

The future

The key to these cases was the trading environment. There was no doubt that misrepresentations were made – they were captured in electronic communications. There was also no dispute that the firms had established compliance systems and that they knew and tolerated the trading conduct identified as wrongful by the government.

Whether the USAO has ceded the filed to the SEC after two trial losses is unclear. The SEC is proceeding although the agency have yet to take a case to trial. While neither the USAO nor the SEC fully considered the trading environment as reflected in the claims in the indictments and complaints, it appears to have impacted the view of the jurors. The verdicts make it clear that the jurors carefully evaluated each charge and made thoughtful, considered decisions as evidenced by the split verdicts.

In the future the firms may evaluate their compliance policies and procedures. While the expert testimony in Litvak may well be correct about the trading environment, repeated misrepresentations is not the proper manner in which to conduct business – and it clearly has consequences. Perhaps the end result of these cases is to bring a bit of sunlight into a dark corner of the securities markets, encouraging improvement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.