CFTC stands by price manipulation allegations against Nomura trader
Several months after John Patrick Gorman III, U.S. dollar swaps trader and managing director of Nomura, secured a reconsideration of his case, the Commodity Futures Trading Commission (CFTC) has filed its opposition to his motion to dismiss.
According to the CFTC, this is a textbook case of fraud and manipulation in the financial markets. The regulator argues that John Gorman knowingly engaged in a scheme to manipulate a U.S.-based market and hid the truth of his actions from his transaction counterparty.
When confronted with his wrongdoing by the CFTC, Gorman lied, telling the CFTC under oath that he had, as requested, preserved certain relevant communications, when in fact he had deleted them. Gorman also lied to the CFTC under oath, stating that he used WhatsApp to communicate with work colleagues only socially, when in fact he engaged in conversations on WhatsApp not just about business transactions, but even about the very transaction at issue in this case.
The CFTC says that his arguments to confuse these clear facts are of no merit, and, for all the reasons outlined in the Court’s prior decision on these issues, and the Court should reject Gorman’s motion.
Gorman, at the time a managing director and U.S. dollar swaps trader on the swaps desk for Nomura in Japan, engaged in a scheme to manipulate the price of U.S. dollar interest rate swap spreads published on a screen displaying prices from a swap execution facility broker firm (“SEF Broker Firm”) in the United States. Compl.
He is alleged to have engaged in this scheme to benefit the Bank in a separate interest rate swap transaction (the “Issuer Swap”) with a bond issuer (the “Issuer”), at the expense of the Issuer.
The Issuer Swap was priced on a pricing call, on February 3, 2015, using a specific screen that displayed prices from the SEF Broker Firm, including prices for U.S. dollar interest rate swap spreads with a ten-year maturity.
According to the CFTC complaint, Gorman knew that the Issuer Swap would be more profitable to the Bank if lower prices for Ten-Year Swap Spreads were displayed on the 19901 screen during the pricing of the Bond Issuance and Issuer Swap.
Although he almost never traded through U.S.-based brokers of the SEF Broker Firm, on February 3, 2015, Gorman arranged to trade through a broker who worked at the SEF Broker Firm’s U.S. office.
Gorman told another trader at the Bank in a text message from his personal cell phone that he did so to “move the screen the quickest”— i.e., to move down the price of Ten-Year Swap Spreads displayed on the19901 screen, which would make the Issuer Swap more valuable to the Bank, at the expense of the Issuer.
Gorman engaged with the head of the Bank’s swaps desk, by text messages on personal cell phones, before the pricing call. Gorman and the Desk Head discussed the fact that the market for Ten-Year Swap Spreads was rising and that there was a large amount of buying interest. They also discussed how far Gorman could move the 19901 screen down, given that market prices were rising.
Gorman told the Desk Head that he, Gorman, thought he could get the screen down to 13.25 basis points,1 and the Desk Head advised Gorman not to “waste too many bullets,” trying to get the price to 13.25. Gorman responded that “I hate pricing these when momentum is against us. Takes all the fun out of it.”
The Desk Head repeatedly suggested that Gorman should sell fewer Ten-Year Swap Spreads given the upward move of the market, including telling Gorman during the pricing call, “Don’t fight the spreads / The more you keep the better.”
Selling fewer Ten-Year Swap Spreads would have been economically rational because Gorman and the Desk Head expected prices to rise (i.e., that they would be able to sell at better prices later). In addition, if prices continued to rise as expected, and if Gorman sold Ten-Year Swap Spreads before buying the Issuer Swap, Gorman would be selling low and buying high, guaranteeing that he would lose money on the Ten-Year Swap Spreads.
In spite of the Desk Head’s direction (“Don’t fight the spreads / The more you keep the better”), Gorman timed his trading through the Broker during the pricing to move down the price of Ten-Year Swap Spreads on the 19901 screen, in the opposite direction of where the market was moving. Gorman was not trading because he legitimately wanted to sell at the price levels he transacted at, but rather, in his own words, to “get the print” (i.e., set the quoted price at Gorman’s desired level), and those trades sent a false signal to the market concerning the supply of Ten-Year Swap Spreads.
When Gorman stopped trading to move down the price of Ten-Year Swap Spreads on the 19901 screen, the price on the screen immediately rose and, for over 18 hours, did not return to the level to which Gorman’s trading had moved it for the pricing.
When Gorman spoke to the Issuer during the pricing of the Bond Issuance and Issuer Swap and quoted the price displayed on the Broker Screen during the pricing call, Gorman did not disclose to the Issuer that the only reason a lower price was displayed on 19901 during the pricing call was because he had sold Ten-Year Swap Spreads to move the price down, that there were more bidders than sellers at the SEF Broker Firm, or that market prices had been rising as a result of the heavy buying interest.
Gorman also did not disclose to the Issuer that he sold Ten-Year Swap Spreads during the pricing not because he legitimately wanted to sell at that price level at that time, but so the Bank could “buy” the Issuer Swap at a lower price; or that he was trading through the Broker in the United States because the 19901 screen was being controlled in the United States and thus his trading through the Broker would move the screen “the quickest.”
Gorman’s trading had its intended effect, moving down the price of the Ten-Year Swap Spread on the 19901 screen. The manipulated price was used to price the Issuer Swap with the Issuer, resulting in a more profitable transaction for Gorman’s employer and a less profitable transaction for the Issuer.
Gorman then sought to hide his misconduct from the CFTC. During the course of the CFTC’s investigation of Gorman’s manipulative trading, the CFTC’s Division of Enforcement sent Gorman a preservation request, asking that he preserve certain categories of communications on his personal cell phone. After receiving the request, Gorman deleted communications that were covered by the request, including communications on the messaging application WhatsApp.
He then falsely told the CFTC—both via a May 1, 2019 letter from his counsel to the Division of Enforcement and in sworn investigative testimony before the CFTC on November 20, 2019—that he had complied with the preservation request.
Gorman further lied to the CFTC in the course of its investigation when he claimed under oath that he only used WhatsApp to communicate with certain other employees of the Bank about social topics.
Gorman argues that the Complaint does not state a claim for a manipulative scheme or attempted price manipulation because it does not plead the absence of any legitimate economic purpose for Gorman’s trading.
The CFTC notes that Gorman has made this argument before. Faced with the same argument and case law, this Court held that the CFTC did state a claim for a manipulative scheme and attempted price manipulation.
The regulator says that Gorman’s argument has no new persuasive force than it did when he last made it, and the Court should hold that the Complaint properly states claims for manipulation and attempted price manipulation. Moreover, his argument that his trades were legitimate hedging transactions intended to offset risk contradicts the clear allegations in the Complaint, and cannot be a basis for dismissal.
The CFTC argues that the complaint properly alleges that Gorman made the following material omissions when Gorman twice quoted the price at 13.5 bps during the Pricing Call: (1) there were more bidders than sellers for Ten-Year Swap Spreads; (2) market prices had been rising because of heavy buying interest; (3) the only reason that the price of 13.5 bps was displayed on the 19901 screen was that Gorman traded to move the price down; (4) Gorman deliberately traded through the Broker in the SEF Firm’s U.S. office because that office would move the 19901 screen “the quickest”; and (5) Gorman was trading Ten-Year Swap Spreads to help the Bank buy the Issuer Swap at a lower price, and not because he legitimately wanted to trade at that price level at that time.
The Complaint alleges that this information was material because “the Issuer would have considered what steps it could take to prevent the resulting lower prices from being used to price the Issuer Swap.” The Complaint therefore states a claim that Gorman violated Rule 180.1(a)(2). Gorman’s arguments to the contrary are of no merit, the CFTC says.
The regulator requests that the Court deny Gorman’s Motion to Dismiss in its entirety.