That bond traders lie in the course of business is not controversial. But as several years of government prosecutions have told us, there exists a line at which fanciful exaggerations veer into securities fraud. And although it's hard to know where to draw that line, our old friend Jesse Litvak – recently given two years in the clink for his dogged salesmanship – has emerged as a human litmus test.
Nowhere has the specter of Litvak hung more heavily than over the government's ongoing case against Nomura Securities bond traders accused of fudging numbers in pursuit of fatter margins. One client even told a Nomura trader “don't litvak me!” back in 2013, while evidently being litvaked.
On Monday the SEC fired another volley at Nomura, filing charges against the bank's two former heads of commercial mortgage-backed securities trading, Kee Chan and James Im. In allegations redolent of Litvak's, prosecutors say Im and Chan lied to clients, defrauded investors and – in Chan's case – went so far as to fabricate email correspondence to make a trade.
That latter detail should stick out. Litvak was cleared of nine of the 10 counts against him. What did him in wasn't his predilection for creative untruths, but altering a chat message to a client, a transgression that feds argued went beyond mere puffery and into the kind of lying that warrants several years in a cage.
It's that kind of misdeed that Chan stands accused of. Here's how the SEC describes one of Chan's alleged 2012 trades, a CMBS transaction with a client prosecutors call Trader B:
- Chan submits a bid for a bond at 51-01 (or $51 and 1/32, or $51.03125).
- Twenty minutes later, Trader B inquires about bond. Chan allegedly implies that he bid 51-05 (which he didn't) and even so, “undefined don't think thats a winner.”
- Trader B, assuming 51-05 to be the purchase price, offers ”52/...pay u on top” – i.e., 52 plus a little something for Chan's efforts.
- Forty minutes later, Trader B says he's concerned that he's overpaying: “Feel like we got smoked on this one.” Apparently Trader B has a slightly less credulous colleague. Trader B tells Chan: “between u and me basically [Trader B's partner] is certain u made up that u bid 51-05 already in order to get us to bid.” Is the jig up?
- Not quite. Here's Chan's response, according to the SEC:
Chan sent an email to Trader B purportedly forwarding an earlier internal Nomura email from Chan that seemed to corroborate Chan's 51-05 bid. The email forwarded by Chan was a fake. In fact, Chan fabricated the phony email from an actual email that he had sent internally earlier in the day, altering the bid price from 51-01, which appeared in the actual email, to 51-05, the price that Chan told Trader B he had bid for the bond.
That's all it took! In the end, Nomura made $13,281 from the trade.
In another example, Chan allegedly gave a trader a misleading quote and then, when given an insufficiently high bid, responded ”just wanted to see if you had $ to spend you cheap fk.” Chan had already bought the bonds at $81, the SEC says, but proceeded to narrate an intense bidding process to the customer, suggesting he expected to pay somewhere north of $82. Like other great traders, Chan exhibits a keen sense of drama: “let me see where this shakes out,” he writes of his hypothetical bidding process. Later: “let me chisel the guy.” Per the SEC, Nomura ended up with a “fraudulent profit” of $125,000 thanks to Chan's imaginative gifts.
Chan's colleague Im isn't spared from the embarrassment. After allegedly pulling off a maneuver like the above – telling a customer he bought a bond at price x when it was really a substantially lower y – Im went back to the original seller of the bond and, according to the SEC, “bragged about his lie”:
Im: he paid 78-24
Im: i told him i bot at 78-8 actually
Seller: nice one
None of this tells us anything we didn't already know about bond trading in general or Nomura specifically: Like used-car dealers, traders fib, and it's up to the courts to decide when a fib becomes criminal. But Chan's case could at least produce a linguistic novelty: “Litvaking” might cease to be something bond traders do to clients and become something the government does to bond traders.