Ex-Jefferies Trader Found Guilty in Securities Fraud Case Over Bond Prices

A jury has convicted Ex-Jefferies Group LLC (JEF) trader Jesse Litvak of securities fraud. Litvak was found guilty of 15 criminal counts, including 10 securities fraud counts related to his misrepresenting bond prices to customers so he could make more money for him and his firm. He pleaded not guilty to all the charges. Jefferies Group is a Leucadia National Corp. (LUK) unit.

According to the government, the 39-year-old trader gave clients inaccurate information about the price of residential mortgage-backed bonds and kept the monetary difference. Litvak, who worked at Jefferies from April 2008 through December 2011, is accused of bilking customers of about $2 million, benefiting himself and his employer.

While Litvak’s legal team tried to persuade a jury that statements Litvak made no difference to customers or their decision of whether to buy the bonds, and that the tactics his client employed are “expected,” the government argued that Litvak’s statements did affect his clients. Litvak was also found guilty of a criminal charge accusing him of fraud related to the Troubled Asset Relief Program.

The former Jefferies broker has yet to receive his prison sentence for the conviction. Meantime, he also is facing a parallel securities fraud case brought by the Securities and Exchange Commission. The regulator is accusing him of bilking investors of mortgage-backed securities to make more revenue for his firm.

The SEC says Litvak would buy an MBS from one client and sell it to a different client and lie about the price. He would then take the difference in price and give it to Jefferies. He also, on occasion, purportedly created a bogus seller to make it seem as if he was working out an MBS trade between clients when he was just selling the securities out of his firm, but at a higher cost. The SEC says that Litvak was able to make another $2.7 million for Jefferies because of the fraud.

Although Jefferies is not accused of wrongdoing related to the charges against Litvak, the brokerage firm has reached a preliminary deal to pay $25 million to settle US probes related to this former employee. In addition to reaching a nonprosecution deal with the US Attorney’s Office in Connecticut and settling with the SEC, Jefferies will also pay trading clients affected by Litvak’s actions.

The criminal conviction against Litvak could help a government investigation launched after Litvak was arrested as year. The Wall Street Journal reported that investigators are trying to find out if other traders engaged in fraud similar to what Litvak did. That probe is being conducted by the SEC, the US Department of Justice, and the special inspector general for the Troubled Asset Relief Program, and looks at markups and markdowns, such as the markups made by Litvak.

Traders are supposed to prioritize a customer’s best interests and make sure the investment and its price is suitable for the client and his/her objectives and portfolio. Unfortunately, there are financial representatives who commit securities fraud for profit at cost to investors. That’s where Shepherd Smith Edwards and Kantas, LTD LLP steps in. Our securities lawyers have helped thousands of investors get their money back.

Former NY RMBS Trader Convicted by Federal Jury of Defrauding TARP, Loansafe.org, March 11, 2014
Jury Finds Former Jefferies Trader Litvak Guilty of Fraud, The Wall Street Journal, March 7, 2014

TARP Programs, Department of Treasury

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