Jury Rejects SEC Fraud Claims Against Trader Accused Of Misstatements Over Pricing Commercial RMBS
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  • Jury Rejects SEC Fraud Claims Against Trader Accused Of Misstatements Over Pricing Commercial RMBS

    On May 6, 2022, the long-awaited trial between the Securities and Exchange Commission (“SEC”) and James Im (“Im”)—a former Nomura trader—came to an end when a Manhattan federal jury found in favor of Im.  The SEC brought suit against Im in 2017, claiming that he committed securities fraud by making various alleged misstatements to his trading counterparties in connection with trading commercial residential mortgage backed securities (“RMBS”).  The jury’s decision – particularly in a civil trial as opposed to a criminal one – may raise further questions about the government’s multi-year pursuit of misstatements in the commercial RMBS market that began with the Department of Justice’s case against former trader Jesse Litvak.

    The SEC did not claim that Im lied about the terms of the securities he was trading.  Instead, the SEC claimed that Im made misstatements about the prices he had bought RMBS that he was then selling to his counterparties, and the profits he could realize.  The SEC contended that such lies were material, and thus violated securities laws under the Securities Act and the Exchange Act, as the SEC argued that traders must adhere strictly to factual statements when interacting with counterparties.

    Im took the stand in his own defense and generally did not deny making misstatements to his counterparties.  Instead, he explained to the jury that, in the commercial RMBS market, such misstatements were routine and were always made in the best interest of his employer.   In essence, he argued – as many others have previously argued in briefing and trials – that his sophisticated counterparties could not have reasonably relied upon alleged misstatements regarding Im’s own profit margin, when they had the ability to determine for themselves the prices that they were willing to pay for any given RMBS.

    The eight person jury deliberated for two days before reaching a verdict in favor of Im on all claims.  The government’s pursuit against broker-dealers and individual traders for alleged misstatements in the commercial RMBS market has clearly had its setbacks, some of which we have previously written about. At the same time, the impact it has had on compliance programs is likely here to stay, and firms and individual traders should continue to be cautious in all statements to trading counterparties.