On May 15, 2017, the Securities and Exchange Commission sued two commercial mortgage backed securities (“CMBS”) traders for securities fraud allegedly committed while buying and selling CMBS on behalf of a large broker-dealer during the course of their employment at the firm. SEC v. Chan
, S.D.N.Y, 1:17-cv-3605; SEC v Im
, S.D.N.Y, 1:17-cv-3613. These are the latest in a slew of recent lawsuits that have been brought by the SEC and DOJ as part of a federal crackdown on allegedly deceptive bond trading practices, but the DOJ is notably absent from this latest case.
The SEC’s complaints against the two traders, Kee Chan and James Im, allege that in the course of acting as an intermediary on trades with customers who sought to buy and sell CMBS on the secondary market, the traders deliberately misled and lied to customers about (1) the prices at which their firm bought or sold securities involved in trades, (2) the bids and offers the firm made or received on such securities, (3) the compensation the firm would receive for intermediating the trades, and/or (4) who owned the securities at issue, often pretending that they were still negotiating over a security with third-party sellers when the firm had, in fact, already acquired the security. SEC v. Chan
, S.D.N.Y, 1:17-cv-3605, Compl. at 2 [ECF No. 1] (May 15, 2017); SEC v Im
, S.D.N.Y, 1:17-cv-3613, Compl. at 2 [ECF No. 1] (May 15, 2017). The Complaints also allege that Chan sent an altered email to a customer in order to “corroborate” a lie about what he bid for a security, and that Im bragged to a seller about his purposeful deception of the buyer. Id.
The SEC alleges these improper practices generated hundreds of thousands of dollars in ill-gotten trading profits for the traders’ CMBS desk—profit that the SEC claims was passed on to Im and Chan in the form of bonuses and compensation. Id.
at 2-3. The Complaints seek judgments ordering permanent injunctive relief, disgorgement with prejudgment interest, and civil monetary penalties.
On May 16, 2017, Chan settled the claims against him without admitting or denying the allegations in the SEC’s Complaint by agreeing to disgorge $51,965, pay prejudgment interest in the amount of $11,758, and pay a civil penalty of $150,000. SEC v. Chan
, S.D.N.Y, 1:17-cv-3605, Consent Judgment at 1, 3 [ECF No. 7] (May 16, 2017). Im is contesting the claims against him, and will likely argue (among other things) that any misstatements he made were immaterial to investors.
At least eight people have been criminally charged in connection with the government’s recent crackdown on deceptive bond trading practices, despite the non-frivolous questions that have been raised about whether the types of misstatements alleged constitute material misstatements in the context of bond trading. Earlier this month, three former traders from the same firm as Chan and Im began trial for criminal securities fraud in connection with seemingly analogous statements made in connection with the sale of Residential, rather than Commercial, Mortgage Backed Securities bonds. See
DOJ Press Release, Indictment Charges 3 Former Nomura RMBS Traders with Multiple Fraud and Conspiracy Offenses, (Sept. 8, 2015), https://www.justice.gov/usao-ct/pr/indictment-charges-3-former-nomura-rmbs-traders-multiple-fraud-and-conspiracy-offenses.
And recently, Jesse Litvak was sentenced to two years imprisonment following a retrial for alleged misrepresentations similar to those charged by the SEC against Chan and Im regarding the prices at which Litvak’s firm bought and was willing to resell RMBS bonds, and its role in the purchase and sale of such bonds. (See
Shearman & Sterling LLP, Former Bond Trader Jesse Litvak Sentenced To Two Years’ Imprisonment After High-Profile Re-Trial In Securities Fraud Case
, Need-to-Know Litigation Weekly, May 2, 2017). Although Litvak was convicted of only 1 out of 15 counts of securities fraud on retrial, he received the same sentence as had been imposed after his initial conviction on all charges and before his initial conviction was overturned by the Second Circuit.
The SEC has also participated in the recent crackdown on bond trading. On May 1, 2017, an investment bank agreed to pay $16.5 million to settle claims that it failed to supervise two traders who charged excessive markups on retail MBS transactions. The bank entered the settlement without admitting the SEC’s claims, and the two identified traders agreed to settlements on the same basis.
The recent SEC lawsuits against Chan and Im demonstrate the government’s continued interest in punishing and discouraging misrepresentations by bond traders. But the most significant development may be the fact that criminal charges were not filed against either Chan or Im. While this may represent a shift away from criminal prosecutions to civil enforcement, where there is a lower burden of proof, in light of the DOJ’s relative difficulties in the Litvak case, it is likely too soon to tell whether these recent enforcement actions by the SEC—as opposed to criminal actions by the DOJ—represent the beginning of a new trend. What seems certain, however, is that federal interest in punishing and deterring alleged misstatements by bond traders persists, regardless of potential questions over materiality.