U.S. brokerage firm Nomura Securities International Inc. is repaying US$25 million to fund manager clients after admitting that it failed to supervise traders who misled their clients while negotiating trades in mortgage-backed securities.
The U.S. Securities and Exchange Commission (SEC) brought two related enforcement actions against Nomura Securities, the U.S. affiliate of Japan’s Nomura Holdings Inc., alleging supervisory failures involving traders of commercial and residential mortgage-backed securities (CMBS and RMBS).
According to the SEC’s orders, several Nomura traders “misled customers about the prices at which Nomura had bought securities, the amount of profit Nomura would receive on the customers’ potential trades, and who currently owned the securities, with traders often pretending that they were still negotiating with a third-party seller when Nomura had, in fact, already bought a security.”
The regulator alleged that the firm lacked adequate compliance and surveillance procedures to prevent and detect this sort of misconduct, and that the traders’ actions inflated the firm’s profits at the expense of its customers.
The SEC had also previously filed charges against five traders at Nomura. A couple of those traders have since settled with the commission, but litigation remains ongoing against the others.
In settling the case, the firm agreed to reimburse clients the profits it earned on any trades involving the traders’ misconduct. In addition to the US$25 million being returned to clients, the firm agreed to pay US$1.5 million in penalties.
The SEC said that the penalties imposed in the case “reflect substantial cooperation” by Nomura during its investigation, and its subsequent efforts to improve its surveillance procedures and other internal controls.
“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.