Securities and Exchange Commission v. Im

Background

The Securities and Exchange Commission (SEC) sued James H. Im under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Securities and Exchange Commission Rule 10b-5. The SEC alleged that Im, who was co-head of Nomura Securities International’s commercial mortgage-backed securities trading desk, gave prospective buyers or sellers false or misleading information about mortgage bonds.

The SEC estimated that the acknowledged and alleged misrepresentations generated an additional $366,743 in profits for Nomura. Im’s compensation was linked to the overall performance of Nomura’s commercial mortgage-backed securities trading desk, and he received $3.79 million in discretionary bonuses from 2010 through 2014. Im disputed whether his statements generated additional profits for Nomura or additional compensation for him.

Summary-judgment standard

Summary judgment is appropriate only when there is no genuine dispute about any important fact and the moving party is entitled to judgment under the law. The court must view the evidence favorably to the party opposing the motion and deny summary judgment if a reasonable jury could rule for that party.

Falsity of the April 26, 2010 statement

Im argued that the SEC could not prove his statement was false without definitively establishing that Nomura had not received an 11.5 bid that day. The court rejected the argument. A reasonable jury could infer from the bidder’s earlier discussion of paying about 12 and the bidder’s later purchase at 12.25 that the bidder would not have offered only 11.5. A jury could also find that Im’s statement was misleading because he omitted the earlier negotiations, even if the bidder had restarted negotiations at 11.5.

Materiality

Materiality asks whether a statement was important to a reasonable investor. Im argued that no investor testified definitively that the investor would have obtained a better price or abandoned the transaction if Im had told the truth.

The court held that this was not the required legal standard. The SEC presented testimony that statements about bond prices and ownership were important and could affect investors’ negotiation strategies. One investor testified that it was highly unlikely he would have bid as high had he known Nomura had bought the bond at a lower price. The court concluded that the SEC had enough evidence to present its materiality theory at trial, while Im could present his competing theory to the jury.

Scienter

Scienter is the required mental state for the SEC’s claims under Section 17(a)(1) and Rule 10b-5. It can be shown through an intent to deceive, manipulate, or defraud, or through reckless conduct that is highly unreasonable and represents an extreme departure from ordinary care.

Im argued that investors did not rely on traders’ statements about bond prices and therefore he could not have intended to defraud anyone through those statements. The court rejected that argument for several reasons. First, materiality and intent were factual issues suitable for a jury. Second, Im’s testimony could support an inference that he believed his misrepresentations would affect investor conduct and produce better prices for Nomura. Third, the SEC presented evidence of a motive and opportunity to commit fraud, including a link between Im’s discretionary bonuses and the trading desk’s performance.

The court also found that the SEC had enough evidence to argue that Im acted recklessly. Nomura’s policies and training instructed employees not to lie and required truthful communications without misleading omissions. The court further considered evidence concerning the criminal prosecution of a trader at a competing firm for misrepresenting the costs of acquiring or reselling securities. The court denied summary judgment on scienter.

Aiding-and-abetting claims

Im argued that the SEC’s claims that he aided and abetted Nomura’s securities fraud should fail because the SEC could not establish the underlying securities-law violation. Because the court rejected Im’s arguments about falsity, materiality, and scienter, it also rejected this argument.

Disposition

The court denied Im’s motion for summary judgment and directed the Clerk of Court to close the motion at Docket Number 55. The order left the SEC’s claims unresolved.