SEC Charges Former Jefferies Director with MBS-Related Fraud

The managing director of the mortgage-backed securities (MBS) desk atrnJefferies and Co. has been charged with fraud for allegedly lying about thernorigin and history of MBS he was selling to investors following the crash ofrnthe housing industry.  The Securities andrnExchange Commission (SEC) has charged Jesse Litvak in federal court inrnConnecticut for activities that generated $2.7 million in additional revenuernfor Jefferies between 2009 and 2011.   The manipulation ofrnMBS sales also improved Litvak’s standing in the company as his bonuses werernpartly determined by the revenue he generated. </p

According to court papers, Litvak sometimesrnbought a MBS from one customer and sold it to another customer, lying to thernsecond customer about the price paid to the first in order to price thernsecurity higher.  On other occasions he misledrnpurchasers by creating a fictional seller to cover that he was just selling MBSrnout of his firm’s inventory at a higher price.  The SEC said that becausernMBS are generally illiquid and difficult to price, it is particularly importantrnfor brokers to provide honest and accurate information.  Litvak’srncustomers included some funds created by the U.S. government under a programrndesigned to help strengthen the markets for MBS during the financialrncrisis.  Had these customers been aware that they could have paid less forrnthe MBS they purchased, they likely would have done so the SEC said.</p

 “Brokers must always tell their customers therntruth, particularly in complex securities transactions in which it is difficultrnfor investors to determine market prices on their own,” said George Canellos,rnDeputy Director of the SEC’s Division of Enforcement.  “Litvak repeatedlyrnlied to his customers and invented facts to bring additional profits into hisrnfirm and ultimately his own pocket at their expense.”</p

 The SEC’s complaint charges Litvak with violating the antifraudrnprovisions of the federal securities laws, particularly Section 10(b) of thernSecurities and Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of thernSecurities Act of 1933.

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