Matthew Katke, formerly of Royal Bank of Scotland Group Plc (RBS) and Nomura Holdings (NMR) has pleaded guilty to conspiracy to commit securities fraud for his involvement in a multi-million dollar bond scam to bilk customers. As part of his deal he will cooperate with prosecutors into its investigation of mortgage-linked bonds and collateralized debt obligations.
Katke traded securities that were backed collateralized loan obligations, which are high-yield corporate debt. The charge is related to activities he engaged in while at RBS. Prosecutors say that Katke and co-conspirators made misrepresentations to get customers to pay prices that were inflated and sellers to say yes to deflated bond prices. The scam took place from around 2008 to June 2014.
Court documents say that Katke and co-conspirators sought to profits on bond trades through the false statements they gave customers. They misrepresented the prices that RBS had paid to get a bond or what it was asking to sell it. They also misled clients about whether a bond was from RBS’s inventory or a third party. RBS is cooperating with the probe.
As part of the agreement to cooperate with the U.S. government, Katke may have to testify in grand jury proceedings or trials as regulators continue to look at transactions involving debt backed by corporate loans and mortgages. He also faces up to five years behind bars.
Last year, ex-Jefferies Group LLC (JEF) trader Jesse Litvak was convicted of securities fraud for misrepresenting facts to clients. He has appealed.
As part of Katke’s deal, if Litvak wins his appeal, he too can withdraw his plea.
Collateralized Loan Obligations
CLOs pool corporate loans that are high-yield and portions them into securities of different risks and returns. The equity trench, which is the lowest unrated portion, offers both the greatest risks and possibilities of the highest returns because the inventors are the first to see their payouts lowered when the loans backing the collateralized loan obligation default.
Ex-RBS Debt Trader Pleads Guilty in Deepening Bond Probe, Bloomberg, March 11, 2015
Former RBS trader pleads guilty in U.S. to cheating customers, Reuters, March 11, 2015
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