Bond Pricing Chats Are at Heart of U.S. Case Against Traders

(Bloomberg) -- U.S. prosecutors working to convict three former Nomura Holdings Inc. mortgage-bond traders are trying to convince jurors that lying about prices amounts to fraud.

For a second day Tuesday, attorneys quizzed Zachary Harrison, a former Putnam Investments LLC portfolio manager, about his dealings with the Nomura traders. Prosecutors finished up their questioning and then lawyers for Ross Shapiro, Michael Gramins and Tyler Peters began cross-examination, seeking testimony favorable to the defense.

The government’s case includes transcripts of recorded chats between the traders and customers inlcuding Harrison. The chats are replete with bond-trader jargon, but prosecutors summarized them in a May 13 court filling. Here’s a sample of some of the chats between Peters and Harrison, as summarized by the government:

  • In one chat, Peters told Harrison he could buy an HVMLT mortgage-backed bond at 63. Within eleven minutes, Peters actually purchased the bond at 62. Two minutes after the trade ticket issued, Peters lied to Harrison, indicating that Nomura was still in the process of trying to purchase the bond, according to prosecutors.
  • In another chat, two minutes after the trade ticket was issued for an LXS bond, Peters indicated to Harrison that he was still negotiating the purchase of the bond, prosecutors said.
  • And in a third chat, Peters indicated to Harrison that the buyer of an INDA bond was paying 82-28 when, in fact, the buyer had agreed to pay 83-12, the U.S. says.

Michael Brown, a lawyer for Peters, has argued that the chats don’t accurately depict Peter’s statements to Harrison. He has asked the judge to keep the summaries out of evidence. Some chats have been shown to jurors, though.

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Harrison is back on the stand Wednesday. In earlier testimony, he described how he made investment decisions and took prosecutors through transcripts of the chats.

Putnam was involved in 11 of the 20 trades where the defendants are accused of lying, and Harrison was the only representative to deal with them on those trades. Harrison told jurors that he relied on pricing he was given by the Nomura traders while weighing it against other market information and his own research. 

Under questioning from defense attorneys, Harrison said he encountered lies or inaccurate information throughout the marketplace. He referred to transcripts of chats in which he called counter-parties “shady” or “generally behaving with bad protocol or doing something suspicious." The defense is seeking to show that what the three Nomura traders did is part of everyday negotiations in the bond market and not a crime.

“You perceived that misstatements and falsehoods occurred on a fairly regular basis?” asked Guy Petrillo, an attorney for Nomura’s Shapiro.

“Fairly regular is a very subjective term,” Harrison said. “Multiple times per week I found myself in situations where I thought I was receiving misstatements or inaccurate information.”

Marc Mukasey, an attorney for Nomura’s Gramins, began his questioning of Harrison on Wednesday. He asked Harrison about the process he used to decide whether to invest in a bond.

Harrison testified that Gramins always delivered the bonds he agreed to deliver, “barring mistakes or miscommunications,” at the prices that had negotiated.