The managing director of the mortgage-backed securities (MBS) desk at
Jefferies and Co. has been charged with fraud for allegedly lying about the
origin and history of MBS he was selling to investors following the crash of
the housing industry. The Securities and
Exchange Commission (SEC) has charged Jesse Litvak in federal court in
Connecticut for activities that generated $2.7 million in additional revenue
for Jefferies between 2009 and 2011. The manipulation of
MBS sales also improved Litvak's standing in the company as his bonuses were
partly determined by the revenue he generated.
According to court papers, Litvak sometimes
bought a MBS from one customer and sold it to another customer, lying to the
second customer about the price paid to the first in order to price the
security higher. On other occasions he misled
purchasers by creating a fictional seller to cover that he was just selling MBS
out of his firm's inventory at a higher price. The SEC said that because
MBS are generally illiquid and difficult to price, it is particularly important
for brokers to provide honest and accurate information. Litvak's
customers included some funds created by the U.S. government under a program
designed to help strengthen the markets for MBS during the financial
crisis. Had these customers been aware that they could have paid less for
the MBS they purchased, they likely would have done so the SEC said.
"Brokers must always tell their customers the
truth, particularly in complex securities transactions in which it is difficult
for investors to determine market prices on their own," said George Canellos,
Deputy Director of the SEC's Division of Enforcement. "Litvak repeatedly
lied to his customers and invented facts to bring additional profits into his
firm and ultimately his own pocket at their expense."
The SEC's complaint charges Litvak with violating the antifraud
provisions of the federal securities laws, particularly Section 10(b) of the
Securities and Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the
Securities Act of 1933.