Investment brokers have certain obligations to all their clients: to not only tell the truth, but also to provide guidance that reflects the client’s specific needs and wants. This responsibility is also known as suitability. Although suitability may at first seem amorphous, in reality, the law has set out very clear guidelines for what types of statements and promises a broker can make to a client, as well as legal penalties for infringing of those boundaries.
In the Nomura Holdings Inc. trial, three professional investment brokers – Ross Shapiro, Michael Gramins and Tyler Peters – were charged with directly lying to their own clients and other brokers and training their subordinates to do likewise, creating a corporate culture of deception for personal profit. The evidence in the case lay primarily in electronic records of communications between the brokers and their clients, demonstrating that the three blatantly lied about the purchase price of a mortgage bond in order to drive up its value.
Because the mortgage bond market does not incorporate frequent trading, and does so usually only between expert traders, it can be difficult to tell how prevalent this type of misrepresentation actually is. Lively debate and conversation about the price of the mortgage bond is normal, but where does this cross the line into fraud? The law is clear: if the information would prevent a reasonable investor from making a fully informed decision, or change the outcome of their decision, then the misrepresentation is criminal in nature and liable to prosecution.
The defense argued in the Nomura Holdings Inc. case that no statement made by a mortgage bond broker should be taken as entirely literal and that buyers, either professional or otherwise, have the moral imperative to do their own research as to the circumstances, value, and reasonable price of bonds. The argument may have been compelling, but it did not speak to the conspiracy to commit fraud that prosecutors say developed between the three brokers on trial and their underlings. Of the three brokers tried, Peters was cleared of all charges, Gramins was convicted on conspiracy to commit fraud but cleared of directly committing fraud, while Shapiro’s case led to a hung jury. A retrial is likely for Shapiro.
Rather than taking a lesson on the value of honesty, it seems Wall Street is more focused on the means of learning how to avoid leaving a paper trail when they conduct illicit or unethical conversations. Rather than relying on email, voicemails, or phone systems that record all calls, some unscrupulous brokers are moving towards self-destructing electronic communication systems, such as WhatsApp, iMessage, and others.
Investors of every caliber should be aware of these developments and avoid excessive discussion via these types of impermanent communication. Broker fraud continues to plague the bond industry, often finding new ways to evade legal scrutiny. The Frankowski Firm has the experience and industry knowledge to help investors in the complicated world of financial law. If you or someone you know has lost money as a result of the unethical practices of a broker or investing firm, please contact the investment fraud attorneys of The Frankowski Firm at 888-741-7503, or complete our contact form.