The Securities and Exchange Commission recently charged Jesse Litvak, a former executive at New York-based broker-dealer Jefferies & Co., with defrauding investors while selling mortgage-backed securities (MBS) so he could increase his firm’s revenue following the financial crisis. According to the SEC’s complaint, filed in federal court in Connecticut, Litvak worked in the firm’s Stamford, Conn., and his misconduct lasted from 2009 to 2011. In addition, the U.S. Attorney’s Office for the District of Connecticut announced criminal charges against Litvak.
Litvak was a managing director whose job duties included arranging trades for customers on the MBS desk at Jefferies, according to the SEC’s complaint. Litvak would purchase an MBS from one customer and sell it to another customer, but on several occasions he lied about the price at which his firm had purchased the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm. Litvak also misled purchasers by creating a fictional seller to make it appear that he was arranging a MBS trade between customers when, in fact, he was selling MBS out of his firm’s inventory at a higher price.
Significantly, MBS generally are illiquid and difficult to price, which makes it particularly important for brokers to provide truthful, accurate information. Further, 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. Clearly, if these customers could have purchased MBS at a lower price they would have done so.
“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 alleges that Litvak’s deceit generated more than $2.7 million in additional revenue for Jefferies, while improving his stature at the firm, because his bonuses were determined in part by the amount of revenue that he generated for the firm.
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.
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