The US Securities and Exchange Commission is charging two-ex Nomura (NMR) head traders with fraud. Kee Chan and James Im ran Nomura Securities International Inc.’s commercial mortgage-backed securities desk. The regulator claims that they purposely lied to customers to inflate profits for themselves and the firm. As a result, said the SEC, the two of them made an additional over $750K in trading profits for the desk. They received healthy bonuses as a result.
Commercial Mortgage-Backed Securities
CMBSs are asset-backed securities that have commercial real estate loans as their underlying assets. These debt obligations are often called bonds. CMBSs are illiquid securities.
According to the Commission, while serving as trade intermediaries with customers seeking to sell and buy CMBSs on the secondary market, Im and Chan made it seem as if they were working out bond purchases with a third-party seller at more than what Nomura paid to obtain the bonds. Im even allegedly told a customer that he had sought to deceive on purpose. Meantime, Chan is accused of modifying a customer email to protect his lie regarding a bond’s bid price.
In the SEC’s complaint, the regulator pointed out that as a Nomura Managing Director,Chan would have been privy to the policies and training materials involving costumer communications and the need for “integrity and accuracy.” The SEC believes that Chan deliberated lied to customers.
As part of the settlement, Chan will pay almost $52K in disgorgement plus almost $11K in interest, and a $150K penalty. He is not, however, denying or agreeing to the SEC’s allegations.
The Commission’s case against Im has yet to be resolved. The SEC’s complaint accuses him of not just purposely and “recklessly misrepresenting material price” details but also of making up whole conversations and negotiations that never happened with third parties who didn’t exist in order to make his lies more credible sounding to customers.
In other Nomura-related news, the criminal trial against three ex-Nomura Holdings mortgage bond traders continues. Michael Gramins, Ross Shapiro, and Tyler Peters also are accused of lying about prices.
According to Bloomberg, in chat transcripts between the defendants and customers, Peters told ex-Putnam Investments LLC portfolio manager Zachary Harrison that he could purchase a HVMLT mortgage-backed bond at 63. Peters bought it at 62. Soon after the trade ticket was put out, Peters told Harrison that Nomura was still attempting to buy the bond.
Another chat transcript shows Peters making it seem as if a buyer had bought an INDA bond at 82-28 when the latter had consented to make the purchase at 83-12. Peters’ defense attorney argued that the conversations are not an accurate depiction of his client’s actual “statements” to the former Putnam Investments portfolio manager.
Harrison, who testified this week, said that he had depended on the pricing information provided to him by Nomura traders. However, he also testified that such lying and inaccuracies were not uncommon in the marketplace. Putnam was involved in eleven of the trades in which the three defendants allegedly lied.
Bond Pricing Chats Are at Heart of U.S. Case Against Traders, Bloomberg, May 17, 2017