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January 19, 2018  

Traders Breathing Easier as Charges Fade

The U.S. government’s crackdown on improper structured-product trading practices appears to be in its final stages.

The initiative, focusing on instances in which dealers overcharged secondary-market clients for their structured-product investments, has seen its active court cases shrink to just three — from more than a dozen at its peak.

One of the remaining proceedings stems from a partial mistrial involving former Nomura home-loan bond traders Michael Gramins and Ross Shapiro. A retrial had been expected to start this month, but the Department of Justice on Jan. 16 asked U.S. District Court Judge Robert Chatigny in Hartford to delay jury selection until July.

Gramins and Shapiro, meanwhile, have asked the court to dismiss the matter. In June 2017, a jury convicted Gramins of a single conspiracy charge and was deadlocked on two others. The jury also was deadlocked on a single charge against Shapiro, while clearing him of several others. A colleague, Tyler Peters, was fully acquitted.

The Justice Department also is pursuing a similar case against former Cantor Fitzgerald residential mortgage-bond trader Dave Demos, who is scheduled to be tried in April. And the SEC is seeking civil damages from former Nomura commercial mortgage bond trader James Im, who has yet to go on trial.

Just a year ago, the Justice Department and SEC were juggling numerous proceedings that had arisen in the course of their investigations. But a flurry of subsequent resolutions, some seen as friendly to the defendants, has prompted talk that further charges are unlikely. “We are either at the end or very near the end of this particular run of investigations . . . I think there is not really an appetite to bring more criminal cases unless the government finds very, very egregious conduct,” Orrick Herrington attorney Greg Morvillo said.

Among the proceedings that wrapped up in 2017 was a case in which the SEC accused former Barclays residential mortgage-bond trader Yoon Seuk Lee of lying to customers about excessive markups. On May 15, the regulator fined Lee $200,000 while banning him from working at a brokerage firm for one year.

Kee Chan, who worked alongside Im at Nomura, agreed in May to pay $213,723 of fines and disgorgements while submitting to a three-year ban. The SEC’s accusations in his case mirrored those against Im, who maintains his innocence.

Frank Dinucci, who worked under Gramins and Shapiro at Nomura, pleaded guilty to one count of criminal conspiracy to commit fraud in April while testifying that his superiors trained him to lie to clients. Having lost his job at Nomura during the investigation, he voluntarily left AOC Securities following his plea.

Another former member of Nomura’s residential mortgage bond trading desk, Caleb Chao, testified against Gramins and Shapiro in exchange for a non-prosecution agreement. Although he lost his job at Nomura, the case isn’t mentioned on his Finra page and he has been working at StormHarbour Securities since March 2016.

The government’s sweeping investigation began in 2012 amid suspicions that former Jefferies trader Jesse Litvak had overstated mortgage-bond prices to clients. Following two trials that eventually brought a conviction on one count of securities fraud, he began serving a two-year prison sentence in September.

Beyond those formally accused of wrongdoing, the proceedings have affected a number of market professionals. Trader Mike Romanelli, for example, was let go from Nomura during the investigation but never took the stand or was charged. He also worked at StormHarbour for a time but left in October for parts unknown.

And one of Nomura’s alleged victims, Putnam Investments portfolio manager Zach Harrison, testified that he lied to trading counterparties at times. He lost his job over those tactics in May 2016, and since has been trading with his own money.

Former RBS staffers Matthew Katke and Adam Siegel, meanwhile, pleaded guilty to criminal securities-fraud charges in 2015 and agreed to cooperate with investigators — including those building the case against Demos. They won’t be sentenced until September, at the earliest.

When it comes to day-to-day business, traders said the once widely discussed crackdown barely comes up in conversations anymore. But the effects on their interactions with other market participants has been lasting. Now, instead of lying or even telling the truth about what they paid for specific bonds, the tendency is to refuse to talk about it.

“It removed the need to be a used-car salesman, but you could also say it reduced transparency,” one trader said.