This was a government appeal from the district court’s grant of a new trial motion, under Fed.R.Crim.P. 33, on a count of conspiracy to commit security fraud, in violation of 18 U.S.C. § 371. See 15 U.S.C. § 78j(b) (securities fraud). The Circuit, however, reversed the district court and remanded “with instructions to reinstate the conviction and proceed to sentencing.” 2019 WL 4554521 at *1.
The case concerned the distinctive market of Residential Mortgage Backed Securities (“RMBS”). The district court granted the defendant’s Rule 33 motion on the only count on which the jury convicted (out of 9 total counts), on evidentiary grounds relying on United States v. Litvak, 889 F.3d 56 (2d Cir. 2018) (“Litvak II”), which concerned the same RMBS market. The district court found that — similar to what occurred in Litvak II — a government witness misstated relevant agency law in a way that unduly supported the government’s theory about the “materiality” of the defendant’s purported misrepresentations. The Circuit, however, held that the evidentiary issues at Gramins’s trial didn’t rise to the level of Litvak II.
Gramins and his alleged co-conspirators traded in RMBS (between 2009 and 2013) at Nomura Securities International, Inc., a broker-dealer registered with the SEC. “RMBS are large and complex aggregations of residential mortgages and home equity loans” that banks create by packaging groups of mortgages “and issuing bonds backed by the principal and interest payments of the homeowners who received the mortgages.” 2019 WL 4554521 at * 1.
But because of “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.” Id at *2.
Consequently, institutional investors contacted registered broker-dealers like Nomura when looking either to buy or sell a particular security. Gramins (and fellow traders) would then contact other institutional investors to find a counterparty to complete the transaction. Traders like Gramins would try 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,’ ‘market making,’ and ‘riskless trading.’” Id. at *2. And “[t]he 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,’ and often negotiate the amount of the difference explicitly with the broker-dealer.” The RMBS buyers and sellers didn’t communicated directly, but through the broker-dealers like Gramins. Id.
The government’s theory was that Gramins (and fellow traders) made misrepresentations to the buyers and sellers of RMBS, misstating offers and sales prices and making a pretense of ongoing negotiations between the counterparties (to get buyers to increase theirs bids, and sellers to lower prices) to increase Nomura’s profits (because Nomura would obtain the seller’s RMBS at the lower sale price and sell them, for itself, to a buyer whose bid was supposedly inflated by the simulated negotiations). The defense argued, however, that in this market of sophisticated investors who relied on complex mathematical models, Gramins’s representations would not have been “material” to a “reasonable investor” in the RMBS market. Id. at *10-11; see id. at *10 (securities fraud under 15 U.S.C. § 78j(b) requires proof that the defendant, “acting with scienter, made a material misrepresentation (or a material omission if the defendant had a duty to speak)” – and a misstatement is material if there is a substantial likelihood that “a reasonable investor would find the … misrepresentation important in making an investment decision.”)
The jury found Gramins guilty of only one count: conspiracy to commit securities fraud in violation of 18 U.S.C. § 371. Of the 8 remaining counts, the jury acquitted Gramins on 6 counts (5 counts of wire fraud and 1 count of securities fraud), and it hung “on one count of securities fraud and one count of wire fraud.” 2019 WL 4554521 at *6, *8.
After the verdict, the district court granted a new trial (under Fed.R.Crim.P. 33) on the one count of conviction, on the ground that one of the government’s counterparty witnesses had indicated he believed Gramins was acting as his agent, which would be an incorrect statement of agency law: Gramins was not the counterparty’s agent, as the Circuit had held for an RMBS broker-dealer in Litvak II.
In Litvak II, the Circuit vacated a conviction for securities fraud because one of Litvak’s counterparties testified (for the government) that broker-dealers serve as agents between buyers and sellers of RMBS. Litvak II, 889 F.3d at 63 (internal quotation marks and alterations omitted).Those statements were incorrect. In the RMBS market, the broker-dealer “transact[s] at all times as a principal, and never as an agent for any counterparty.” Id.. The misstatement of agency law provided two grounds to vacate Litvak’s conviction. First, the testimony should’ve been excluded on relevancy grounds under Fed. R. Evid. 401. The “materiality” element in securities fraud “is an objective one, requiring the government to show that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Id. (emphasis in original; citation omitted). Id. at 59. So in Litvak, the counterparty’s erroneous and subjective belief wasn’t probative of the “views of a reasonable, objective investor” in the RMBS market. 2019 WL 4554521 at * 13. Second, in Litvak, the counterparty’s subjective view about an agency relationship should have excluded under Fed. R. Evid. 403 because it had a tendency to confuse or mislead the jury. Litvak II, 889 F.3d at 69; 2019 WL 4554521 at * 13.
The Circuit concluded that at Gramins’s trial, however, the counterparty “made no misstatements of agency law,” and “[n]owhere in the record of Gramins’s trial does [the witness] state that he believed that Gramins was his agent, nor that Gramins owed him fiduciary duties. In fact, nowhere in the record does [the witness] advert to any principles of agency law at all.” 2019 WL 4554521 at * 13.