Jury Offers Split Verdict in Nomura Trader Case (Audio)

be fooled by bluffing or puffing. My guests are John Coffey, of professor Columbia Law School and Robert Hockett, a professor Cornell University Law School. Jack. The jury acquitted the traders or deadlocked on everything but the conspiracy charges. They found Michael Gramman's guilty of conspiracy, Tyler Peter's not guilty, and they deadlocked on conspiracy. As far as Rod Shapiro, what does that show, Well, let's just underlinine how severe a

defeat this was in reality for the government. There were twenty seven They got a conviction on one of those. Twenty seven three, as you said, brahone and twenty three were acquittals. Moreover, this case follows an earlier Connecticut case in January involving Jesse Litteck, who was also charged with ten counts of very similar kind of misconduct, and they're the jury acquitted on nine convicted on one. So it looks like the governments had in a great deal of

difficulty convincing the jury that there's something truly culpable here. Uh. And I think the fact that they convicted Michael Gramman's may be explained by his being the only defendant where they had a tape recording of him instructing others on how to lie to the clients. Bad evidence really hit the jury, whereas every other case the witnesses seifying for the government were cross examined and they had to admit they had done the same thing and looked equally bad. Oh.

That I think left the jury pretty confused. But what's your case gone this mixed jury verdict? Well, of course it very much matches Jack. I think the main thing to know is that it remains difficult to secure conviction and the securities from the case of this kind on not only the materiality UH portion of the large but also the intense UH portion of the tribes. I think

it's not. It's not without significance that the count that was the easiest to secure conviction on was that that involved the smokiest of all possible smoking guns and Jack, does this show that the jury didn't buy the theory that the puffing and line by bond traders is fraud or that the prosecutors just didn't give the jury enough evidence. Well, we'd have to interview the jurors to really answer there.

But do recall that in securities fraud case, you have to prove not simply that the defendant broke a legal rule, you have to prove that he will fully did so, that it was his to liberate intent to violate the law. And that may have looked greater, particularly in the case of the junior employees, who look like they were just

taking instructions from their superiors. So the wilfulness problem here it may have been the biggest obstacle, because one defendant did look like he'd willfully done this, and they did

convict him on at least one count. But it does look like the government has difficulty explaining why this behavior is truly criminal when the defendants keeps saying everybody was doing it well, Bob, even after the defense attorney's also got one of the alleged victims, Putnam Investments portfolio manager Zachary Harrison, to admit under cross examination that he had

lied during negotiations and he wasn't charged with anything. So, Mike, the jury have been thinking, well, where's the crime here? I suppose that's that's that's possible. I mean that the trouble I think was figuring out exactly what was pompting the juries decision at the case that so much evidence going in so many different directions, and worse, it's also

a relatively complex charge that was brought. That's hard is brought against the defense where themselves relatively complex as well, and so it's actually quite difficult appear at exactly what what it mattered both uh to the jurors. Maybe one other point of making this connection is that there is in a sense that kind of an underlying link between the intention elements of the offense on the one hand and the materiality part of the offense on the other.

And that is as fall as if somebody believes that the person to whom one is selling something, he's taking what he is saying with the grain of salt. Anyway, then it's all the more difficult right to show that the person actually intended to defraud the person, because the person actually thinks that the counterparty is in fact taking but he says with the grain of solvent, he gets harder to show that he's actually thinking himself to be committing a fraud. E Jack. The defendants did not take

the stand. They didn't even present a evidence, and I wonder if some of them are reconsidering that at this point. But does the split verdicts show that that didn't make any difference, or can't we really read anything into that. Well, of course, it's the normal position of what colored defense counsel to resist having the defendant take the stand, because you could easily get a perjury conviction coming out of that if you deny guilt and the court thinks you

were lying about that. Uh So it's it's the normal case to attack the witnesses rather than to try to put the defendant on the stand to tell his side of the story. All in all, the significance of this is the government has wanted best a very weak peric victory, and I think it may deter his apartments justice from bringing similar cases it has in the past. Bob might deter the Department of Justice from retrying the two defendants

on the deadlock counts. That's a call, um, I mean, it might almost be a kind of mood point at this point, right, because I have a funny feeling that the Justice departments during the Trunk years, he's going to be a little bit less to sell us about prosecutions of this kind in any of that. Um. On the other hands, you know where things different. Right, let's assume that we were still, you know, the middle of the Obama era. Um, would this future prosecutions. I tend to

think not. Actually, I tend to think that they're going

to sort of keep at that. They would keep at it, uh in hopes of making a point and at least sort of frightening market participants with the possibility of prosecution, uh, and thereby frighten them into maybe making puppery a little bit less common of practice or less sort of central to their common practices today, Jack, have these cases cases, excuse me, have these cases, including the lip fact case that you were talking about, and some of the please

been a wake up call for traders who believed once that they could do anything to sell a bond. Oh, I think it has I think it has them very concerned. The problem is they may just be hiding their behavior better. Some of them are now using encryptic codes that the government can't correct. Some of them are doing face to

face conversations. I think it has affected the industry because these are intelligent people and they have been surprised to find out that the government has been studying them and tape recording them, and they know they are generally susceptible

to such tape recording. By the way, I think what's likely to happen here is that the government will give them something like a deferred prosecution agreement, because the government usually when there's been a mistrial does offer reduced charges, and here reduced charges would likely be something like a

deferred prosecution agreement for the two who are not convicted. Bob, do you believe that the scrutiny by the government has pushed questionable sales tactics farther into the shadows rather than making people change the way that they do business. Well, I think I think it's really raised the incentive, of course, people to push more of what they do in the shadows. Um, But I don't know that that's actually a problem as such.

I mean, for for two reasons, right. The first is, uh, the shadow kinds of communications are themselves problematic as far as the law is concerned. Uh, And so there are you know, in the sense, what you're doing is pushing people into committing another kind of offense if you persisted doing that, and that's of course going to render them vulnerable. Charges along those lines are just sort of actions brought.

They are predicted on those behaviors. The second point, I think that it's very often said, right that you shouldn't regulate this or that, because then you'll push this or that into some sort of realm where it's harder to regulate it. But that's a bit like uh see. To me, that's something bit like saying, you know, you shouldn't constitute any crime at all because otherwise people become us secretive in committing your crimes. I mean, that's no, there's no

real answer. It's not it's not a good reason not to prosecute something if it on otherwise to be prosecuted. What it's a good reason to do is to make sure that you actually be hunt your enforcement in these sort of shadow realms as well. If that's where the behavior moves after, it's kind of uh wished out of

lawyer sort of legitimate or well wit days Jeff. Market analysts say because of this change in traders in the way they're doing business, whether they're cleaning up their act or doing it um more surreptitiously, that liquidity has been reduced. Do you see that, I really don't. I think that the bond markets are robust, there's tremendous demand. I believe we should have stronger enforcement, but I have to say

it's easier said than done. It is very difficult to interfere with traders who are going to move off the normal venues into a non paper corded settings. I think we'll deter some people and will cause others to go underground. I still believe we should have stronger enforcement, but I have to say these kinds of defeats are going to

chill the government. Young use attorneys do not like to effectively lose cases, and I think the government may go back to things they're easier to prosecute, like insider trade. We're having a much better track record, Bobby, do you believe that it's clear to traders, to bond traders what exactly fraudy is whether an omission can have the same effect as a misrepresentation for example. Yeah, I think it's

been somewhat unclear actually in recent years. And and one way of interpreting what has been doing in these cases is actually the triberally impose a bit of player life. I mean, a line is fairly difficult to draw between each adjuration or puffery on the one hand and just outright lining on the other, so that at least he

was kind of gray. And that's actually one reason that this case was kind of gray, and why I suspect it is the case that some of the charges were sort of easier for the diary to find sort of convincing than others. But one way to deal with that in a problem, it's precisely to sort of reimpose a certain bright line rules such as the rule is simply

not to lie. Right if you actually, if it's a nice cut and dried answer to how much you pay for exture security that you're not now trying to sell, Um, it's not that difficult to understand, right, all right, don't tell people that you paid at different price than you actually pay. Right, it's very easy I think to impose a bright line with respect of that kind of uh talk that's in a communication, something in the way of

bright line order lines. Here at least with respect of these questions, where the easy about to impose those sense of wines and that will actually then clarify the beginning of fraud. I suspect to market participants on both sides of trades. Jack, How is the SEC proceeding in this area in tandem with the federal prosecutors or separately? Oh? Yes, they very very much act in tandem. But there's one

big difference. The SEC brings about eighty percent of their enforcement cases in front of the administrative law judges in inherse proceedings. That means there's no jury, and the administrative lawd judge is someone who's a specialist in securities law. It's much easier to convince that kind of judge than a somewhat innocent jury that doesn't really know what's going on.

And I quiffe some of these cases moved back to civil sec enforcement in administrative law proceedings, Bob, if you could explain about the bond market and why for so long, it has been more difficult to deal with, and the government has sort of left it alone till about four years ago the actions of bond traders and then decided

to crack down. Okay, so we've lost Bob for a few minutes, Jack, Can you talk a little bit about the bond the bond business and why there was this crackdown started about four and a half years ago on bond traders actions when they had basically been dealing in this level where they said that they were dealing in sophisticated transactions and they didn't have to behave in the same way that other people did, other business people did, other traders. The bond market has always been very opaque.

You're not trading against the backdrop of a constant stream of prices going across one market. There's possibility that different prices are occurring at the same time between different traders, and because it's much more opaque, there was more room for people to engage in little white lies. A trader would tell the other side, I can't sell it that price because that's less than I pay for it. I don't want to report a loss, and the other side was like, all right, I'll give you an eighth of

a point more, so we don't have to do that. Uh, those little white lies were the culture of treading, and I think the government, after the financial crisis decided they were no longer going to accept this cultural story of little white lies, and they found some pretty egregious cases where public investors were regularly hurt injured by phony trading data. Welcome back, fam, I understand your back on the phone. We lost you for a moment there. Let's talk a

little bit about Jesse. It's fact who whenever you hear about bond cases, you'd hear about Jesse lit fact because he was tried twice and found guilty twice. So let's talk a little bit about that case and what it's sort of established. Yeah. So, really this was sort of the font of all of the cases that we've been

talking about along these lines lately. Right, I mean, this was the first sort of mark of a sea change, so that the government was no longer going to treat uh little white lines, as says Jack was calling them, or even larger white lines, uh, as if they were sort of innocent. Right. This was the first sort of signal that the guvernment was going to get curious about at least ensuring that people don't affirmatively mislead or affirmatively lie uh to to those to the counterparties or two

others in the park. That's I mean, one of the things that to keep in mind here is, you know, even a common law outright line was that it was a problem, I was what would would constitute drawing. And one of the innovations made by the securities laws was to sort of adds to sort of traditional commissi of fraud a category of omissive fraud. And that's the sense in which securities laws and securities regulations can be here

to sort of having pushed a kind of envelope. But sort of ironic, I think about all of these post lift back cases, including the case itself actually uh is these were cases of actual commissive fraud. Uh. And the thought that that these would have been controversial, or that it would be thought to be sort of odd that the should be prosecuted, I think is itself quite odd. It sort of tells us something about where we've come

as a sort of financial culture. Uh. And and and I think as as Jack was suggesting, and as I was suggesting earlier, I mean One way of doing what the government's been doing of lage is is saying, okay, look, let's get back at least to a sort of standards pursuance which you can't just sort of outright lie to your counterparties. Uh and and and hope to sort of get away with if I think, well, everybody discounts where I say anyway, because it's sort of expected that we

lie here, that's just not going to cut it any longer. Jack, do you see more plea deals or less plea deals because we see some people getting off. As you said, this wasn't a roaring victory for the government. To put it mildly, well, a government, of course, can point to the fact that one trader was convicted and that will destroy his career. He'll never be a trader ever. Again, it's only one count out of twenty seven. But they do have an effective body on which they can hinge

a little bit of general deterrence. I do think, however, we're going to see the government push more of these cases into administrative proceedings where they avoid the difficulties of juries and have an administrative law judge make the decision. Bobby, is it actually more fitting for these kinds of cases to be um SEC cases with civil penalties rather than criminal cases. I mean, this is also the talk of about insider trading as well. A lot you know, is

it is it really criminal or should it more be civil? Right? Well, you know, I sind to think that in it if in these kinds of cases it makes sense for the greater part of them to be regulatory offenses or for the sec to belcats. But it's very helpful for you know, some some smallish attraction of such cases I think to be prosecuted as criminal offenses, because that really sends the

signal much more dramatically. Right. And as you know, one of the principal criticisms has been sort of leveled against regulators or against the sort of the general governmental response UH to financial broad and financial misdeeds in the wake of the crashes, because it has been precisely the fact that there's been so little in the way of criminal prosecution done and so much more in the way of

UH regulatory settlements UH. And the why um and and and the reason for the criticism might think is precisely because people sort of understand that even one or two criminal cases UH can carry a great deal of sort of symbolic value and in that sense exercise a great deal of the turrent effects. Uh, even if the great bulk of cases are are brought by the regulators rather than prosecutors. Jack insider trading was Preet Barra's domain. Let's say he became famous as a sheriff of Wall Street

for prosecuting insider trading. Have the bond cases centered more in Connecticut, Jack s c h C chairman have gone out and lobbied U S attorneys to bring more criminal cases. But generally federal criminal prosecutors want a very clear cut case with much stronger evidence, with a real witness, with

a real victim. And that's why there's been very few of these cases insider trading or bond trading brought outside one or two jurisdictions, most notably the Southern District of New York, which likes to bring these cases, has gotten very experienced and very good at them. And it's also possible that New York juries are a little bit more

skeptical of investment bankers and brokers and traders um. But getting criminal enforcement brought outside of the Northeast is really quite rare and I think that's still an area where their sec and the government has got a lobby and proselytiz all u S attorneys that they need to look at white collar crime more than just street crime. And

and uh, Bob, what's what's your answer to that? If you remember the question theory, remember whether whether it seems as if there there is more of a focus There wasn't as much of a focus in in Manhattan on

on this on bond trading. It was more you know, insider trading, and it was all about insider trading that really brought free Berrara into the spotlight, right right, Yeah, So so part of it, of course, it's the fact that the way to bond trading, uh trade that goes that it's not centered as as as as much of Manhattan as a lot of other securities trading is. And that's probably part of the reason. And a lot of it in that does occur right out of Connecticut, So

it sort of makes sense. I is right that there will be more focused on it there than in New York. So where do you see the investigations going now, Jack, do you see them even even more investigations as far as some of the things that traders may be doing now to try to hide what they're doing. For example, you talked about using encrypted messaging apps or personal cell phones. So do you see the SEC or the federal prosecutors

trying to look into that which seems like it's difficult. Well, they have in the recent prosecution of the Wall Street gambler. There could be of these Las Vegas gambler. Mr Walters, Uh, he used encrypted phones and that sounded very very suspicious to the jury. Um, I think we do have. Southern District prosecuters have become very attempt they now how to bring certain kinds of criminal prosecutions. The SEC has well

known priorities they advertise with their priority. These are one of their largest priorities, which is where I think future criminal cases will come from, is the Foreign Corrupt Practices Act. They are very eager to find people paying foreign bribes on behalf of the U. S Company or a foreign company that's trying to broad to obtain business, and that I think will be the source of quite a few future criminal prosecutions. So well, money laundering, those are somewhat

easier cases to bring. They don't get you involved with what it means when you make a particular crypto comment to another in a quick phone conversation. They look at the follow the money and you see hundreds of thousands of dollars moving, and the jury understands that that's money laundering. Bob. When you teach your students UH is bond or bond trading? Is that is that an area that they're very interested in? Or do they go more towards UH securities and and

insider trading? Well, I mean my stings are quite unenlinded. It seems about what kind of UH financial practice of going in, going to go into but of course make it right now. Contact is it's very hot. Hedge funds, private equity are very hot as well. If this assumed to be a great deal of interest in bond trading

as such. But I think a part of that is because, um, you know, the students at that stage are not really fully aware of all of the differences that that's sort of finer distinctions about what the life of a bond trader looks like on the one hand, and the bond they felt life of a security trader or securities underwriter

looks like on the other hand. They do know, however, that there's something kind of vaguely sexy sounding or a sort of exciting and futuristic sounding about things like skin tech and startup law and UH and again private equity operations UM cases like this. I don't know, perhaps they'll make bond trading with a little bit wor it because at least in the sense that this sort of thing has become a public topics again in a certain sense

of it hadn't been for a while. But but I have a funny feeling that the future, as far as again the sort of being coming cohorted student systems learned UH is still going to be with again the intact of private equity at the startup type stuff for a while now. Well, I thank you both for being on Bloomberg Law. That's Robert Hack and he's a professor at Cornell University Law School and John Coffee, professor at Columbia Law School and two of our favorite guests here on

Bloomberg Law. Thank you both for being here.