Nomura’s mortgage bond traders lied to customers with impunity because the firm lacked the internal controls to prevent it, the SEC says
Japanese financial giant Nomura will repay about $25 million to customers to settle allegations that it failed to supervise traders who lied about the quality of mortgage-backed securities, the Securities and Exchange Commission has announced.
According to the SEC, Nomura bond traders made false and misleading statements to customers while negotiating sales of commercial and residential mortgage-backed securities. Several Nomura traders allegedly lied about the price at which Nomura had bought securities, the amount of profit the financial giant would make on customers’ trades, and who currently owned the securities. Traders often claimed that they were still negotiating with a third-party seller when Nomura had, in fact, already bought the mortgage bonds, the SEC said.
According to the SEC, traders could lie with impunity because Nomura lacked compliance and surveillance procedures that were reasonably designed to prevent it. The traders’ lies inflated Nomura’s profits on CMBS and RMBS at customers’ expense, the regulator said.
“Firms acting as dealers in opaque markets like those for CMBS and RMBS must take steps to prevent misleading communications with their customers,” said Daniel Michael, chief of the SEC Enforcement Division’s Complex Financial Instruments Unit.
“These orders underscore that firms must have adequate supervisory procedures, particularly surrounding the sale of complex instruments,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office. “Weak procedures, such as those found here, may enable employee misconduct to go undetected.”
To settle the SEC’s charges, Nomura agreed to be censured and to reimburse customers the full amount of firm profits on any RMBS or CMBS trades in which a misrepresentation was found. The company will pay more than $20.7 million to RMBS customers and more than $4.2 million to CMBS customers. Nomura will also pay a $1 million penalty in the RMBS case and a $500,000 penalty in the CMBS case.
The SEC noted “substantial cooperation” by Nomura during its investigation, and said the company had made efforts to improve its internal controls.
This isn’t the first time Nomura has been penalized for shoddy mortgage-bond sales practices. In October, the financial giant agreed to pay $480 million for misleading investors about the quality of its mortgage-backed securities.
