SEC, USAO Charge Former Broker with Securities Fraud Tied to Market Crisis

The SEC and the U.S. Attorney for the District of Connecticut filed, respectively, civil and criminal fraud charges against a former account executive at Jefferies & Co. arising out of the financial crisis. The charges center on the sale of mortgage backed securities or MBS to funds, including six connected with the Legacy Securities Public-Private Investment Program or PPIP. That fund was established by the U.S. government to help support the MBS market during the market crisis. SEC v. Litvak, Civil Action No. 3:13-cv-00132 (D. Conn. Filed Jan. 28, 2013); U.S. v. Litvak (D. Conn. Jan. 25, 2013).

Defendant Jesse Litvak was associated with Jefferies from 2008 through 20011. He was a managing director and a trader in the firm’s MBS group, resident in the Stamford, Connecticut office. At the time he began with the firm he was an experienced MBS trader. His compensation at Jeffries depended in part on sales.

The MBS sold by Mr. Litvak were generally illiquid. The markets were opaque. Purchasers were aware that a charge for their compensation was added to the purchase price of the security by Jefferies as either part of the price or an add-on. At the same time, the lack of transparency in the market meant that there was no way for a purchaser to determine the accuracy of representations made to them about the purchase prices which were the predicate for the broker transaction charges.

Mr. Litvak is alleged to have overcharged customers by about $2.6 million in 25 transactions between 2009 and 2011. Customers were overcharged in two primary ways, according to the court documents. In some instances Mr. Litvak misrepresented the purchase price paid by his firm for the security. This would increase the commission or spread to Mr. Litvak and his firm. In other instances he misrepresented the nature of the transaction, falsely telling the customer that the security was being acquired in a transaction from another customer when in fact it was being sold out of inventory. Again the purchase price and thus the compensation to Jefferies was increased.

Many of the transactions were done through electronic communications such as instant messages, emails and online chats. Several of these are quoted at length in the Commission’s complaint. That complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).

The parallel criminal indictment contains eleven counts of securities fraud, one count of TARP fraud, and four counts of making false statements. Both cases are pending.

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