U.S. v. Shapiro: When is a Lie OK?

Former trader at Nomura Securities International Inc., Ross Shapiro, is the highest ranking of three ex-Nomura traders that are on trial for not only hiding the amount of profit they received in the selling of residential mortgage-backed bonds, but teaching others how to do it as well. In a report this week by Bloomberg writers Chris Dolnetsch and Matt Scully, they discussed the interesting question the jury is being asked: when is a lie is considered deceiving and when is it not?

Shapiro along with Michael Gramins and Tyler Peters falsified purchase information in order to manipulate the money manager to pay a higher price for the bond, sub sequentially putting more money in their pockets. According to Bloomberg, the complex securities don’t change hands very often and when they do, specialized traders haggle over prices in order to determine the yields that investors will earn on the bonds. Unfortunately for everyday investors, few of them are knowledgeable enough to understand the connection between the prices paid for directly or indirectly owned bonds and the resulting investment returns.

The jury on the trial recently listened to the testimony from one of those affected by the case. Aadil Abbas, Hartford Investment Management Co. Portfolio Manager, said he lied to clients during negotiations and was trained to use the tactics by the defendants.

Joshua Klein, who is representing Shapiro, told jurors the market is “riddled with deception” and that deceit is come across so often in the profession that it was a non-issue.

“If you take away the lies and put aside the misrepresentation and just ask each witness that testified, ‘Did you want these bonds?’ they still would say yes, Klein said. “They still think it was in the interest of their investors.”

The government says traders are guilty when they intentionally misrepresent the acquisition or sales price of a bond during negotiations. Assistant U.S. Attorney Liam Brennan told jurors, “To say that these are sharp business practices, and everyone engaged in them, is not just an affront to everyone in the securities industry, it’s an affront to everyone in every industry that has ever tried to be an honest dealer.”