United States v. Gramins

• Decision Date: 20 September 2019
• Docket Number: August Term 2018,No. 18-2007-cr,18-2007-cr
• Citation: 939 F.3d 429
• Parties: UNITED STATES of America, Appellant, v. Michael GRAMINS, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

939 F.3d 429

UNITED STATES of America, Appellant,

v.Michael GRAMINS, Defendant-Appellee.¹

No. 18-2007-cr

August Term 2018

United States Court of Appeals, Second Circuit.

Argued: November 27, 2018

Decided: September 20, 2019

For Appellant: Heather Cherry, Assistant United States Attorney (David E. Novick, Jonathan N. Francis, Sandra S. Glover, Assistant United States Attorneys, on the brief), for John H. Durham, United States Attorney for the District of Connecticut, New Haven, CT, for the United States of America.

For Defendant-Appellee: Marc L. Mukasey (Jeffrey B. Sklaroff, on the brief), Greenberg Traurig, LLP, New York, NY, for Michael Gramins.

Before: Livingston, Carney, and Sullivan, Circuit Judges.

Debra Ann Livingston, Circuit Judge:

On June 15, 2017, a jury in the United States District Court for the District of Connecticut convicted Defendant-Appellee Michael Gramins of conspiracy to commit wire fraud and securities fraud. Gramins and his alleged co-conspirators, former traders of Residential Mortgage Backed Securities ("RMBS") at Nomura Securities International, Inc. ("Nomura"), lied to their counterparties about contemporaneous price negotiations with other, third-party counterparties. Those lies caused Nomura’s counterparties to increase their bids and decrease their offers when they would not otherwise have done so. The counterparties believed that they were adjusting their bids or offers in response to bona fide , contemporaneous negotiations with those other, third-party counterparties, and paying Nomura a modest commission to facilitate supposedly "riskless" transactions with those counterparties. In reality, Gramins’s false statements carved out sizable spreads between Nomura’s buying-counterparties’ bids and its selling-counterparties’ offers, allowing Nomura to reap substantial profits unbeknownst to the counterparty on either side of the transaction.

At Gramins’s trial, the government elicited testimony from several of Nomura’s counterparties that Gramins’s and his alleged co-conspirators’ lies were important to their investment decisions—in other words, that those misrepresentations were "material." Shortly after the jury’s guilty verdict, we held in United States v. Litvak , 889 F.3d 56 (2d Cir. 2018) ("Litvak II "), that the admission of testimony from a counterparty who erroneously asserts the existence of an agency relationship between himself and his broker-dealer unduly prejudices the jury on the issue of materiality, violating Federal Rules of Evidence ("FRE") 401 and 403 and requiring a new trial. Following the issuance of our decision in Litvak II , Gramins supplemented his pending motion for a new trial, arguing that one of the government’s witnesses at his trial—Joel Wollman of QVT Financial—had implied (without explicitly stating) an erroneous belief in the existence of an agency relationship between himself and Gramins. The district court (Chatigny, J .) then granted Gramins’s motion for a new trial, citing Litvak II . We REVERSE the district court’s order and REMAND to the district court with instructions to reinstate the conviction and proceed to sentencing.

BACKGROUND

I.

Gramins’s conspiracy capitalized on certain distinctive features of the market for RMBS. As noted above, "RMBS" stands for Residential Mortgage-Backed Securities. RMBS are "large and complex aggregations of residential mortgages and home equity loans." Litvak II , 889 F.3d at 59. Banks typically create RMBS by packaging together groups of mortgages and issuing bonds backed by the principal and interest payments of the homeowners who received the mortgages. Investors assess the value of RMBS in part by estimating the probability of repayment or default on the various loans that comprise them.

RMBS are priced in terms of percentage of face value, with the face value of each RMBS derived from the value of its component mortgages. Investors negotiate RMBS prices in small increments called "ticks," with one tick equal to 1/32 of a percentage point of the bond’s face value. Thirty-two ticks therefore equal one full percentage point of face value, or one penny on every dollar of face value. So, for instance, if Nomura agreed to buy a RMBS for "65 and 16 ticks," it agreed to pay 65.5% of the face value of that bond.²

RMBS are "bought and sold at very high prices" and, as a result, typically "marketed to large, sophisticated financial institutions" like banks and hedge funds. Litvak II , 889 F.3d at 60. Given the large size and unique features of each RMBS, the RMBS market lacks an "exchange" of the sort on which traditional corporate stocks and Treasury bonds trade. Moreover, the price at which a given RMBS will trade is generally not publicly known. Consequently, institutional investors looking to transact in RMBS must "contact registered broker-dealers ... to find interested buyers or sellers," or transact "directly with [the] broker-dealers" from the broker-dealers’ own accounts. Id.

Enter Gramins. Between 2009 and 2013, Gramins traded RMBS at Nomura, a broker-dealer registered with the Securities and Exchange Commission. Institutional investors frequently reached out to Nomura when looking to buy or sell a particular security. Gramins and his fellow traders would respond to expressions of interest from Nomura’s customers by transacting with the customers from Nomura’s own inventory or by communicating with other institutional investors in the hopes of finding a counterparty willing to complete the desired transaction.

More often than not, Nomura took the latter approach. Brokers like Gramins would attempt to match a prospective buyer of a particular RMBS with a prospective seller of that RMBS (and vice versa), reaping a small commission in return. Industry participants refer to this function alternatively as "facilitating," see J.A. 191, 642, 734, "market making," see J.A. 517, 544, and "riskless trading," see J.A. 194, 252. The last term reflects the fact that, because Nomura "had the potential buyer and potential seller already matched up at the time of the transaction," J.A. 194, it had practically eliminated any of the "market risk" associated with holding the security on its own books, J.A. 252.

Participants in the RMBS market distinguish among three types of RMBS transactions. First, in the "order trade" scenario described above, "a broker-dealer communicates [separately] with an interested buyer and seller and, if successful, effectuates a transaction in which a RMBS is transferred." Litvak II , 889 F.3d at 60. In an order trade, "[t]he broker-dealer owns the bond, but usually briefly, in consummating the transaction between the two investors." Id . Second, in a "BWIC" ("Bids Wanted In Competition") trade, "a putative seller sends a bid-list to multiple broker-dealers," who then "solicit expressions of interest and price ranges from potential buyers" and "place[ ] a bid in the auction of [that] particular security." Id. Both of these types of trades fall within the "riskless" category because the broker-dealer "ha[s] the potential buyer and potential seller already matched up at the time of the transaction." J.A. 194. Moreover, in both contexts, the broker-dealer typically obtains compensation for its "matching" efforts by selling the bond for slightly more than it paid for it. Industry participants refer to this difference as "commission," "pay on top," or "spread," J.A. 195, 196, 580, and often negotiate the amount of the difference explicitly with the broker-dealer.³

A third type of transaction has different features. In a so-called "inventory trade," an investor "buys a bond already held in a broker-dealer’s account" at the time of the parties’ negotiations. Litvak II , 889 F.3d at 60. In that context, the broker-dealer has incurred market risk by holding the RMBS in its inventory for a significant period of time prior to the transaction. And in that context, customers do not pay any additional commission because the broker-dealer has transacted directly from its own inventory—presumably, seeking maximum profit or minimum loss on its earlier investment in the bond—rather than intermediating between two interested counterparties.

Nevertheless, while industry participants frequently distinguish among these three types of trades, the same agency law principles apply to all of them. "An essential feature of all of these trades ... is that the broker-dealer acts solely in its own interest as a principal." Id. at 61. As a matter of accounting, the broker-dealer’s profit in any of the three scenarios outlined above is always simply the difference between the price at which it sold the security and the price at which it purchased it. See id. Moreover, while some RMBS transactions may be effectively "riskless" in practice, the broker-dealer always assumes some risk in the transaction, because "an institutional investor can refuse to purchase a bond held by the broker-dealer even when the investor caused the broker-dealer to purchase it by an expression of interest ...." Id. Consequently, "[a] broker-dealer is not ... an agent for its counterparties in these trades," and the final price in any transaction between broker-dealer and counterparty "is determined in an arms-length negotiation" between the two. Id.

II.

Having outlined the relevant features of the RMBS market, we turn now to Gramins’s conspiracy to manipulate it. At trial, the government proved its conspiracy charge against Gramins with the following evidence. First, three of Gramins’s co-conspirators—former RMBS traders at Nomura—testified to the nature of the scheme. Caleb Chao, a former junior analyst at Nomura, explained that Gramins and others would "misrepresent ... prices to clients," for instance by "tell[ing] the seller that we were seeing a bid that was lower than what the bidder had actually bid" or "tell[ing] a bidder that we had an offer that was higher than the offer actually was." J.A. 580. Chao testified that the effect of these...