Lies and False Statements Used by Traders of Illiquid Securities

Trading securities depends in part on obtaining pertinent, accurate information about the investment in a timely fashion. In contrast, having false or incomplete information can cause a misjudgment to be made. If such information becomes part of the mix of information in the marketplace, the false information can distort pricing. Indeed, deliberately injecting false information into the market is a tactic employed in market manipulation actions.

While incomplete information and materially false information can distort trading in any market, it can be a larger issue in thinly traded and opaque markets. In markets where securities such as residential mortgage-backed securities or RMBS or housing asset-backed securities or MHABS are traded full, complete and accurate information is crucial because the markets are thin and largely illiquid. The point is illustrated by a case involving a Nomura Securities International, Inc. broker and trading in RMBS and MHABS. SEC v. Shapiro, Civil Action No. 1:15-cv-07045 (S.D.N.Y.).

Named as defendants in the action are Ross Shapiro, Michael Gramins and Tyler Peters. The three defendants were hired by the firm in August 2009. Each was responsible for arranging trades between customers involving RMBS and MHABS. Mr. Shapiro was the head trader.

The traders began in 2010 to engage in misconduct. Specifically, they coached traders to lie during negotiations regarding a transaction. At times Defendants instructed traders as to the precise lies to tell customers to extract extra, concealed profits for Nomura traders.

The markets for these securities are illiquid. Accordingly, customers and traders must rely on information available in the markets. If customers knew that more profit was available, they could have paid less fees or received more for the securities involved in the transactions.

Defendant traders engaged in this misconduct to earn more revenue for Nomura when trading RMBS and MHABS. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The matter was resolved by Defendant Gramins. He consented to the entry of a permanent injunction based on the Sections cited in the complaint. See Lit. Rel. No. 26246 (Feb. 13, 2025).