The managing director of the mortgage-backed securities (MBS) desk at Jefferies and Co. has been charged with fraud for allegedly lying about the origin and history of MBS he was selling to investors following the crash of the housing industry. The Securities and Exchange Commission (SEC) has charged Jesse Litvak in federal court in Connecticut for activities that generated $2.7 million in additional revenue for Jefferies between 2009 and 2011. The manipulation of MBS sales also improved Litvak's standing in the company as his bonuses were partly determined by the revenue he generated.
According to court papers, Litvak sometimes bought a MBS from one customer and sold it to another customer, lying to the second customer about the price paid to the first in order to price the security higher. On other occasions he misled purchasers by creating a fictional seller to cover that he was just selling MBS out of his firm's inventory at a higher price. The SEC said that because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information. 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. Had these customers been aware that they could have paid less for the MBS they purchased, they likely would have done so the SEC said.
"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'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.