Three former Nomura Holdings Inc. traders pleaded not guilty to charges that they defrauded investors by inflating the prices of mortgage-backed securities in the wake of the U.S. financial crisis.
The case is the latest to emerge from a U.S. crackdown on deceptive sales tactics in the market for complex bonds tied to mortgages and corporate loans — which aren't traded on transparent exchanges so investors often have to depend on brokers to provide valuations.
The Justice Department and the Securities and Exchange Commission have been working on as many as 10 cases involving similar interactions, two people familiar with the matter told Bloomberg News last month.
Ross Shapiro, Michael Gramins and Tyler Peters are accused of illegally profiting from selling bonds at higher prices than they bought them. They were released on $1 million bail and ordered to surrender their passports. Jury selection for their trial is scheduled for Nov. 10. They face as long as 20 years in prison if convicted.
The three men — who supervised the residential mortgage-backed securities desk at a unit in New York — increased the spread on their trades and generated about $7 million in additional revenue by lying about how much they had paid for debt, according to the SEC.
The former traders were arraigned before U.S. Magistrate Judge Donna F. Martinez in Hartford, Conn., even as authorities await the decision of a federal appeals court in Manhattan on whether to reverse the conviction of former Jefferies & Co. trader Jesse Litvak. Litvak was found guilty last year of similar conduct in the trading of mortgage-backed securities.
Litvak, the first person convicted of fraud tied to a U.S. program set up to stimulate trading in mortgage-backed securities after the financial crisis, has argued that his case would make crimes out of statements made in the course of ordinary negotiations. He said his lies didn't matter to his customers because they paid fair prices.
A ruling in Litvak's case is expected at any time, and a decision in his favor would change at least one pending case brought by the U.S. against a former trader. Ex-Royal Bank of Scotland trader Matthew Katke pleaded guilty in March to taking part in a similar conspiracy, yet his agreement allows him to withdraw his plea if Litvak wins his appeal.
The SEC also alleged that the traders made up fake sellers to hide the fact the bonds were actually held by Nomura and used the deception to mislead clients about the prices they were demanding.
