A former executive at New York-based broker-dealer Jefferies & Co. has been charged by the Securities and Exchange Commission with defrauding investors in the wake of the financial crisis.
According to the SEC’s civil complaint, Jesse Litvak was an experienced trader who joined Jefferies in 2008. Part of his job as a senior trader was to arrange trades between buyers and sellers of Mortgage Backed Securities (MBS). Instead of doing so ethically, however, Litvak allegedly lied to and/or misled his customers in order to generate more than $2.7 million in additional revenues for his firm and to obtain additional bonuses for himself.
“On numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, customers about the price at which his firm had bought the MBS and the amount of his firm’s compensation for arranging the trades,” alleged the SEC in the complaint. “On some occasions, Litvak also misled the customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies’ inventory.”
The complex, illiquid, and difficult-to-price nature of MBS makes broker honesty particularly important, said the SEC.
MBS customers want to sell high and purchase low, but the market’s opacity makes it difficult for them to know if they’re getting the best deal possible. “The buyer of the MBS has no way to learn the price paid by the broker, unless the broker chooses to tell its customer,” stated the SEC in the complaint.
“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,” wrote the SEC. “Had these customers been aware that they could have paid less for the MBS they purchased, they likely would have done so.”
In the case against Litvak, the SEC is seeking disgorgement of ill-gotten gains, payment of civil monetary penalties, and a permanent injunction. The Commission has demanded a trial by jury.