Federal prosecutors charged a former senior trader at the Jefferies Group on Monday with defrauding his clients â€" and the government â€" while selling them mortgage-backed securities after the financial crisis.
Jesse C. Litvak, the former Jefferies trader, is accused of generating more than $2 million in revenue for Jefferies by overcharging his customers through deceitful conduct. Those who are said to have been his victims include some of the world’s largest investment firms, including Soros Fund Management, Magnetar Capital, BlackRock and Wellington Management.
The government was also a victim in this case, prosecutors said, because Mr. Litvak’s clients were managing money that was pat of the Treasury Asset Relief Program, or TARP, the $700 billion bailout fund. As part of a public-private investment program, the Treasury picked nine private firms to invest in toxic mortgage-backed securities and help remove them from the clogged balance sheets of the large banks.
While the alleged violations â€" cheating brokerage clients by misrepresenting the prices of securities â€" might typically prompt the loss of a job or civil lawsuits, such conduct rarely, if ever, rises to the level of a federal criminal prosecution.
The case demonstrates the aggressive prosecutorial stance of the special inspector general for TARP, or Sigtarp, which led the investigation. The office, now led by Christy Romero, has been responsible for criminal cases filed against 121 individuals.
“! Illegally profiting from a federal program designed to assist our nation in recovering from one of our worst economic crises is reprehensible,†said David B. Fein, the United States attorney in Connecticut, whose office brought the charges. The Securities and Exchange Commission filed a parallel civil action in the case.
Federal agents arrested Mr. Litvak, 38, early Monday morning at his apartment on the Upper East Side of Manhattan. He made an appearance in Federal District Court in Bridgeport, Conn., and was released on $1 million bail. Mr. Litvak, who worked at RBS Greenwich Capital earlier in his career, joined Jefferies in 2008 and was fired in December 2011.
“Jesse Litvak did not cheat anyone out of a dime,†said Patrick J. Smith, Mr. Litvak’s lawyer a DLA Piper, in a statement. “In fact, most of these trades turned out to be hugely profitable. Jesse looks forward to the trial in this case so that his name can be cleared and he can get on with his career.â€
While the market for mortgage-backed securities is complex and opaque, the charges against Mr. Litvak are rather simple. Prosecutors said that he deceived his customers about the prices of the securities that he sold to them. The indictment said that Mr. Litvak deployed the scheme in part to increase the size of his year-end bonus.
In some cases, they said, Mr. Litvak would lie about the price at which his firm had bought a security so he could resell it to another customer at a higher price and earn more money for the firm. In other instances, the government said, he created a fake seller to give the impression that he was arranging a trade between two customers, when in fact he was selling the security out of his firm’s inventory at a high price.
“The kind of false cl! aims made! by Litvak were unfit for a used-car lot, let alone a marketplace for mortgage-backed securities,†said George S. Canellos, the S.E.C.’s deputy director of enforcement.
Mr. Smith, the lawyer for Mr. Litvak, said that the trades were transactions between sophisticated market participants and that the profits that Jefferies earned on each trade were well within industry norms for the mortgage-backed securities market.
Mr. Litvak wants Jefferies to pay his legal fees related to the government’s investigation, and he has filed papers in the Delaware Court of Chancery demanding compensation from the bank. Jefferies has refused to reimburse him, arguing that it fired Mr. Litvak for cause. Richard Khaleel, a spokesman for Jefferies, declined to comment.
The case first showed up on the government’s radar after one of Mr. Litvak’s customers, AllianceBernstein, complained to Jefferies that the bank had overcharged it for mortgage-backed securities, according to people briefed on the case. According to records from the Financial Industry Regulatory Authority, or Finra, Jefferies settled the case with AllianceBernstein for $2.2 million.
Court papers depict Mr. Litvak as an exuberant salesman, frequently communicating with instant messages and peppering his communications with slang. When Mr. Litvak reported to a client, Wellington Management, about a sham purchase, he wrote “winner winner chicken dinner.†Another time, the complaint said, Mr. Litvak gave a customer a false report on the price of a security that he sold to a hedge fund, York Capital Management. “We are doneski gorgeous!†he wrote.
