Nomura trader fails to ditch CFTC case
John Patrick Gorman III, a U.S. dollar swaps trader and managing director of Nomura, has failed to dismiss a complaint by the Commodity Futures Trading Commission (CFTC), accusing him of manipulation of the price of USD interest rate swap spreads.
On Monday, February 28, 2022, Judge Victor Marrero of the New York Southern District Court signed an order denying Gorman’s motion to dismiss.
Let’s recall that, according to the CFTC complaint, on February 3, 2015, Gorman III, trading from Tokyo, Japan for a U.S. affiliate of Nomura, engaged in a scheme to deceive and 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 – JBIC. Gorman engaged in this scheme in order to benefit the bank in a separate interest rate swap transaction with a bond issuer, the CFTC says.
The trader argues that the CFTC’s Complaint is its latest salvo in a campaign to win judicial approval for a vast expansion of the law of market manipulation.
The Judge, however, disagreed with the defendant. In his order, the Judge found that the CFTC Complaint plausibly alleges Gorman planned and timed his trades with the purpose and effect of creating an artificial price for Ten-Year Swap Spreads.
The Judge noted that the CFTC alleges Gorman’s trades during the Pricing Call were economically irrational because Nomura would lose money on the trades, except in one crucial respect: the trades avoided greater losses for Nomura on the Issuer Swap. The trades were irrational in part because Gorman and the Desk Head could sell Ten-Year Swap Spreads at a greater price later on — i.e., after the Pricing Call — since they expected the price to increase.
Nonetheless, Gorman sold hundreds of millions of Ten-Year Swap Spreads during the Pricing Call, which means Gorman sold the Ten-Year Swap Spreads at a lower price while buying the Issuer Swap at a higher price.
The Court also found that, in the end, the CFTC plausibly alleges Gorman intentionally planned and timed his trades with the purpose and effect of creating an artificial price for Ten-Year Swap Spreads.
The Complaint sums up the above allegations simply: “Because Gorman saw that market prices were rising, because he traded in spite of the Desk Head’s warning not to ‘fight the spreads,’ and because he intended to move prices down, against the market, Gorman intended to cause an artificial price for Ten-Year Swap Spreads with his trading.”
The Court thus found the CFTC has plausibly alleged a scheme liability claim.
Gorman will have tp file and serve an answer to the Complaint within 15 days of the date of the Order.