Federal officials filed criminal and civil charges against former Jefferies senior MBS trader, Jesse Litvak, 38, yesterday for allegedly defrauding investors and the government while selling mortgage-backed securities from 2009 to 2011.
Here's a synopsis from the SEC's release (emphasis ours):
According to the SEC’s complaint filed in federal court in Connecticut, Jesse Litvak arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies. Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm. On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price. Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information.
The SEC alleges that Litvak generated more than $2.7 million in additional revenue for Jefferies through his deceit. His misconduct helped him improve his own standing at the firm, as his bonuses were determined in part by the amount of revenue he generated for the firm.
According to the 16-count indictment from the United States Attorney for the District of Connecticut, Litvak's alleged victims include some of the biggest names on the Street such as Soros Fund Management, D.E. Shaw, and Third Point, etc.
What's more is six of those alleged victims were funds created by the Treasury Department to help strengthen the MBS market as part of the 2009 bailout plan, the indictment states.
The SEC's complaint also gives examples of trades that Litvak allegedly made money from his misconduct including this one from 2009 with Wellington Management.
On December 23, 2009, Litvak approached a representative at Wellington Management LLP (“Wellington”) about purchasing a MBS called Wells Fargo Mortgage Backed Securities 2006-AR12 1a1 (WFMB 06-AR12 1a1). Litvak suggested to the representative that he was arranging a trade with an active outside party:
yo yo yo….if there is any color you can share on your wfmbs 06-ar10 4A1 from
yest…maybe i can use that as leverage to go beat the guy up that owns the 06-ar12 1a1 bonds….as of late last nite it sounded like he was starting to warm up to the idea of coming off his level…..
The Wellington representative asked Litvak, “what’s the current size and offer” on the MBS, and Litvak responded, “its 3+mm current and he was offering them at 77….” About twenty minutes later, Litvak reported that the seller was not in yet: “he … usually rolls in around now…..so should know soon brotha…..” Half an hour later, Litvak told the Wellington representative that he had bought the MBS at 75-28 and provided details of the supposed negotiation:
winner winner chicken dinner…he is gonna sell em to me at 75-28 as I told him to not get cute and just sell the bonds so you can own them at 76….he said cool…..its 6.23mm orig….a’ight?
Wellington agreed to purchase $6.23 million of the MBS at 76. In actuality, Jefferies had purchased the MBS on December 14, 2009 at 70 (not “75-28”) and held it in its inventory at the time of the sale to Wellington. On December 23, 2009, Litvak concocted the supposed seller and fabricated the details of a negotiation. As he had done before, Litvak lied about the purchase price, Jefferies’ compensation on the trade, and the fact that the MBS was being sold out of Jefferies’ inventory.
Through his misconduct, Litvak made over $150,000 in additional compensation
for Jefferies on this trade.
According to the indictment in U.S. District Court District of Connecticut, he's charged with 11 counts of securities fraud, one count of TARP fraud and four counts of making false statements to the government.
Again, much of Litvak's alleged misconduct happened after the financial crisis.
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