Mortgage Backed Securities Trader Charged with Securities Fraud
A federal grand jury sitting in New Haven, Conn., has returned a 16 count indictment charging Jesse C. Litvak with securities fraud, Troubled Asset Relief Program (TARP) fraud, and making false statements to the federal government.
The indictment alleged that Litvak, while a registered broker-dealer and managing director at Jefferies & Co. Inc., engaged in a scheme to defraud customers on residential mortgage-backed securities (RMBS) trades. Litvak’s victims are alleged to have included numerous investment funds, including six funds that the Department of Treasury established in 2009, as part of the federal government’s response to the financial crisis.
“As alleged, the defendant defrauded six funds established by Treasury and funded principally with government bailout money,” said U.S. Attorney David Fein. “Illegally profiting from a federal program designed to assist our nation in recovering from one of our worst economic crises is reprehensible.”
“As most Americans tried to keep their heads above water during the financial crisis, Jesse Litvak is charged with trying to profit from the taxpayer-funded bailout known as TARP,” said Special Inspector General for TARP Christy Romero. “The charges paint a picture of Litvak shamelessly lying to dupe the government into overpaying for mortgage securities with bailout funds.”
As alleged in the indictment, in 2009, the Department of Treasury began the Legacy Securities Public-Private Investment Program (PPIP), in response to the financial crisis, using more than $22 billion of bailout money from TARP to restart the trading market for certain kinds of RMBS, among other troubled securities. Over 100 firms applied to manage one of the nine PPIP funds established under the program, each of which received between $1.4 billion and $3.7 billion of bailout money from TARP to invest alongside private capital.
According to the indictment, Litvak was a senior trader and managing director at Jefferies & Co. Inc., a global securities and investment banking firm headquartered in New York. Jefferies also had a trading floor in Stamford, Connecticut, where Litvak and other members of its Mortgage and Asset-Backed Securities trading group worked. The indictment alleged that Litvak engaged in a scheme to defraud based on two different types of misrepresentations. In certain transactions, Litvak misrepresented the RMBS seller’s asking price to the buyer or misrepresented the buyer’s price to the seller, keeping the difference between the price paid by the buyer and the price paid to the seller for Jefferies, according to the charges. In other transactions, Litvak misrepresented to the RMBS buyer that bonds held in Jefferies’ inventory were being offered for sale by a fictitious third-party seller invented by Litvak, which allowed Litvak to charge the buyer an extra commission that Jefferies was not entitled to, the indictment alleged.
Through these schemes, the government alleged that Litvak defrauded six PPIP funds and multiple private investment funds of a total of more than $2 million.
The indictment charged Litvak with 11 counts of securities fraud, which carry a maximum term of 20 years in prison on each count; one count of TARP fraud, which carries a maximum term of 10 years in prison; and four counts of making false statements to the federal government, which carry a maximum term of five years in prison on each count.