SEC, U.S. Attorney charge three former Nomura RMBS traders with fraud

Allegedly repeatedly lied to customers, trained junior traders to do the same

The Securities and Exchange Commission and the U.S. Attorney’s Office for the District of Connecticut are charging three former Nomura Securities International residential mortgage-backed securities traders with fraud, accusing the trio of “repeatedly lying” to customers about the pricing information of mortgage bonds and defrauding customers of millions of dollars.

The SEC alleges that while employed as RMBS traders at Nomura, Ross Shapiro, Michael Gramins, and Tyler Peters misrepresented the bids and offers being provided to Nomura for RMBSs, as well as the prices at which Nomura bought and sold the securitizations and the spreads the firm earned intermediating RMBS trades.

According to the SEC, Shapiro, Gramins and Peters also trained, coached, and directed junior traders at the firm to engage in the same misconduct.

The SEC stated that the actions of Shapiro, Gramins and Peters helped to “illicitly generate” millions of dollars in additional revenue for Nomura.

In a parallel action, the U.S. Attorney’s Office for the District of Connecticut announced criminal charges against Shapiro, Gramins, and Peters.

As alleged in the indictment, Shapiro, Gramins, and Peters supervised the RMBS Desk at Nomura in New York. Shapiro served as the managing director, who oversaw all of Nomura’s trading in RMBS, while Gramins was the executive director of the RMBS Desk and principally oversaw Nomura’s trading of bonds composed of sub-prime and option ARM loans.

Peters was the senior-most vice president of the RMBS Desk and focused primarily on Nomura’s trading of bonds composed of prime and alt-A loans.

According to the U.S. Attorney’s Office, the indictment alleges that Shapiro, Gramins, and Peters engaged in a conspiracy to defraud customers of Nomura by fraudulently inflating the purchase price at which Nomura could buy a RMBS bond to induce their customers to pay a higher price for the bond.

Shapiro, Gramins, and Peters also allegedly engaged in fraudulently deflating the price at which Nomura could sell a RMBS bond to induce their customers to sell bonds at cheaper prices, thereby causing Nomura and the three defendants to profit illegally.

According to the indictment, Shapiro, Gramins, and Peters trained their subordinates to lie to customers, provided them with the language to use in deceiving customers, and encouraged them to engage in the practice.

In one instance, one of the defendants’ subordinate traders told a salesperson that he “lied” about the price of bond and “marked up 2 points,” to which the salesperson responded “haha sick . . . well played.”

The victims of this scheme include funds from around the world, retirement plan providers and a Trouble Asset Relief Program fund manager.

According to Special Inspector General for TARP Christy Romero, Shapiro, Gramins, and Peters were all also former employees of Lehman Brothers.

“The alleged misconduct reflects a callous disregard for the integrity and obligations expected of registered securities professionals,” said Andrew Ceresney, director of the SEC’s enforcement division. “Not only did these traders lie to their customers, but they created a corrupt culture on Nomura’s trading desk by coaching more junior traders to employ the same deceptive and dishonest trading practices we allege in our complaint.”

According to the SEC, the lies and omissions communicated to customers by Shapiro, Gramins, and Peters generated at least $5 million in additional revenue for Nomura, and the lies and omissions by the subordinates they trained and coached generated at least $2 million in additional profits for the firm.

While at Nomura, Shapiro, Gramins, and Peters were awarded bonuses based on several factors including revenue generation. Nomura paid total compensation of $13.3 million to Shapiro, $5.8 million to Gramins, and $2.9 million to Peters during the years the alleged misconduct was taking place.

According to the SEC, Shapiro, Gramins, and Peters allegedly went so far as to invent phantom third-party sellers and fictional offers when Nomura already owned the bonds the traders were pretending to obtain for potential buyers.

“The defendants’ alleged scheme was simple: To drive up profits, they lied to and deceived their victims,” Romero said.

“They are alleged to have overstated the price Nomura paid,” she continued. “They are also alleged to have created fictitious third-party sellers when the RMBS sat in Nomura’s inventory. And they are alleged to have bragged about it to each other. All those on Wall Street who engaged in criminal schemes related to TARP programs are warned that SIGTARP will work with our law enforcement partners to uncover and stop bailout-related crime, and that will lead to prosecution.”

The indictment charges Shapiro, Gramins, and Peters with one count of conspiracy, an offense that carries a maximum term of imprisonment of five years; two counts of securities fraud, an offense that carries a maximum term of imprisonment of 20 years on each count; and seven counts of wire fraud, an offense that carries a maximum term of imprisonment of 20 years on each count.

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