Former Nomura Securities International Inc. trader Michael Gramins avoided a prison term for lying to the firm’s clients about mortgage-backed bond prices, dealing the government another blow in a troubled crackdown on tactics used in the trading of complex securities.
A former executive director on Nomura’s residential mortgage-backed securities desk, Gramins was sentenced Thursday by U.S. District Judge Robert Chatigny in Hartford, Connecticut, to two years probation with six months home confinement.
Gramins, 38, who a jury convicted in 2017, was among more than a half-dozen traders charged by federal prosecutors in Connecticut with misrepresenting the prices of mortgage-backed securities to clients in order to increase their firm’s profits and their bonuses. Because the securities aren’t traded on transparent exchanges, investors often rely on traders for valuations.
The prosecutions sent shock waves through Wall Street and led to the suspensions and departures of dozens of traders as broker-dealers increased scrutiny of trading desks and communicate more clearly with clients. But Gramins is the only one of the charged traders whose conviction at trial has stood.
“Mr. Gramins overlooked or failed to appreciate that in a riskless trade, in an order trade, where he is providing a service as a facilitator in order to obtain a commission, he could not affirmatively lie about prices in order to inflate that commission without the counterparties’ knowledge and consent,” the judge said during the sentencing.
Charged along with two other former Nomura traders in 2015, Gramins was acquitted on fraud charges but found guilty of a single count of conspiracy. Prosecutors had asked the judge to impose a “substantial term of imprisonment” to reflect the seriousness of his crime and deter others from committing similar offenses.
“Mr. Gramins has had every advantage in life,” federal prosecutor David Novick said at the sentencing. “Despite all these advantages — or maybe because of them — he needs to be held to the same standard of justice as everyone else.”
Gramins had asked Chatigny to spare him from any time behind bars, saying he has already suffered “significant and irreversible professional and personal consequences as a result of his actions.” He also said a prison sentence was unnecessary to send a message to the market because “the message has already been forcefully sent and clearly received.”
The Nomura traders were swept up in a crackdown that began with the 2013 arrest of former Jefferies LLC trader Jesse Litvak, which put traders on notice that they could face potential criminal prosecution for tactics that were relatively common in the industry.
But federal prosecutors have had difficulty getting its charges to stick. Litvak’s 2014 conviction was tossed on appeal, as was the guilty verdict following a 2017 retrial. Former Cantor Fitzgerald LP managing director David Demos was acquitted of similar charges.
The government also failed to win convictions of the two Nomura colleagues charged with Gramins. His former supervisor, Ross Shapiro, was cleared on fraud charges though a jury deadlocked on a conspiracy count against him, which means he could be retried. Another Nomura trader, Tyler Peters, was acquitted.
A separately charged Nomura trader pleaded guilty in the crackdown in 2017, as did two RBS traders. All three agreed to cooperate with prosecutors and are awaiting sentencing.
Marc Mukasey, a lawyer for Gramins, said Thursday that “the bottom fell out of” the prosecution’s case. “Based on what’s happened in this case, the government’s request for substantial prison time is grotesque.”
After the sentencing, Mukasey said he was “thrilled” with the court’s decision and that “justice prevails.”
A key piece of evidence that may have led the jury to convict Gramins was a recording of an internal Nomura phone call played by prosecutors during the trial, in which the trader was heard discussing what to tell a client to whom he had lied. That call came after Nomura warned its traders not to deceive customers in the wake of Litvak’s arrest.
A Nomura unit in July 2019 agreed to repay customers $25 million to resolve U.S. regulators’ allegations that it failed to supervise traders who made false statements while negotiating sales of mortgage securities.
Gramins and his co-defendants never denied making the misrepresentations. Rather, they argued that their conduct was common in the industry, was discounted by the highly sophisticated investors that they traded with and never caused any clients to actually lose money.
