SEC: Traders Lied to Customers About Prices to Inflate CMBS Desk Profit

Chris Gaetano
Published Date:
May 16, 2017

The Securities and Exchange Commission charged two traders who ran the commercial mortgage-backed securities (CMBS) desk at Nomura Securities International Inc. with deliberately lying to their customers so they could inflate profits of their desk and line their pockets as a result. 

James Im and Kee Chan acted as intermediaries on trades with Nomura's customers who wanted to buy and sell CMBS on the secondary market. The SEC said that the pair's scheme took advantage of the inherent opacity of the CMBS secondary market, where there is no contemporaneous public dissemination of trade prices and purchasers and sellers have no reliable way to learn the prices that dealers paid and received unless the dealers themselves disclosed them during the trade. Nomura's CMBS customers were generally investment advisers and other firms that managed funds that invested in CMBS and other asset-backed securities, and also included
other broker-dealer firms that invested in such securities for their own accounts.

The two, as part of their job, would often negotiate Nomura's purchase of CMBS from one customer and subsequent resale to another customer on the same day, generating profit through the spread between purchase and sale price. 

The SEC said that the pair, between 2010 and 2012, lied to customers about bids and offers made or received for the bonds at issue, the prices that Nomura paid or received when it bought or sold the bonds, and the firm's spread on the trades. They did this to inflate Nomura's spread on the trades, which generated hundreds of thousands of dollars worth of fraudulent profit for the CMBS desk. They SEC also said that they would induce customers to lower their offers and accept less for bonds by lying to them about the bids or sale prices of those bonds, in some cases lying to both buyer and seller about the other party's bid or offer. In other cases he deceived customers by falsely stating that his firm was still actively negotiating to buy the bonds at a certain price, when Nomura had in fact already purchased the bonds earlier at a lower price than what they were telling custoemrs. 

“As alleged in our complaints, Im and Chan operated under cover of an opaque CMBS secondary market to gain illegal trading profits and potentially larger bonuses by lying to firms on the other side of their trades about the prices at which they were buying and selling securities,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

Chan agreed to settle the charges by paying $51,965 in disgorgement plus $11,758 in interest and a $150,000 penalty. Without admitting or denying the allegations, Chan also agreed to be barred from the securities industry with the right to reapply after three years. The settlement is subject to court approval. The case continues against Im.

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