On Thursday, June 15, 2017, a Connecticut federal jury delivered a mostly defendant-friendly verdict in the criminal trial of three residential mortgage-backed securities (“RMBS”) traders charged with conspiracy, securities fraud, and wire fraud. United States v. Shapiro et al., 3:15-cr-00155, Verdict Form (D. Conn. June 15, 2017). This case is one of a slew of recent actions brought by the DOJ and SEC as part of a federal crackdown on allegedly deceptive bond trading practices, on which this newsletter has previously reported.
The government alleged that the three traders conspired to make and made materially false and fraudulent misrepresentations and omissions to their customers in order to obtain “secret and unearned compensation on RMBS trades,” and to deprive their customers of “information relevant to making a discretionary economic decision.” See Shapiro, 3:15-cr-00155, Indictment (D. Conn. Sept. 3, 2015). The traders allegedly overstated the price their employer paid for bonds to induce customers to pay a higher overall price, falsely understated the price at which a buyer agreed to purchase bonds in order to induce the customer to sell bonds at a lower price, and made misrepresentations about the source of bonds, leading customers to believe that the bonds were being purchased from fictitious third parties when they were actually being sold from the firm’s inventory. These allegations are similar to the claims made by the DOJ in United States v. Litvak, 3-13-cr-00019 (D. Conn 2013), where the government’s initial success was narrowed after a retrial in January of this year. See Shearman & Sterling LLP, Bond Trader Acquitted Of All But One Securities Fraud Charges in Retrial, Need-to-Know Litigation Weekly, January 30, 2017. The government also alleged that the three traders continued to engage in allegedly deceptive practices following Litvak’s indictment and after receiving warnings from in-house compliance officials not to engage in such behavior.
Each trader was charged with one count of conspiracy, two counts of securities fraud, and six counts of wire fraud. See Shapiro, 3:15-cr-00155, Verdict Form. After more than a week of deliberations, the jury acquitted one of the traders of all charges, acquitted another trader of eight of the substantive fraud counts and hung on the charge of conspiracy, and convicted one trader of a single count of conspiracy. Id. The jury acquitted this last trader of six counts of fraud and deadlocked on the remaining two fraud counts. Id.
The limited victory for the government may further temper DOJ’s interest in pursuing these types of cases in the future, which involve practices that at least some argue should not be criminalized given that the customers involved had sufficient objective facts from which to make their own determinations as to the fair price of the bonds they were trading. But a recent case brought by the SEC (without a parallel criminal case) suggests that the SEC remains willing to pursue similar claims, which serves as a reminder that any form of deception in the securities trading process will be strictly scrutinized. See Shearman & Sterling LLP, More Bond Traders Sued By The SEC For Alleged Fraudulent Misrepresentations Relating To MBS Prices, Need-to-Know Litigation Weekly, May 23, 2017.
Click here to view United States v. Shapiro, Indictment
Click here to view United States v. Shapiro, Verdict Form