By Aruna Viswanatha and Jonathan Stempel
March 12 Jefferies LLC will pay $25 million to
resolve U.S. criminal and civil investigations into its mortgage
bond trading, after one of its former traders was convicted for
defrauding clients, and authorities said they are investigating
whether other individuals broke the law.
The settlements announced on Wednesday by the U.S. Attorney
in Connecticut, the U.S. Securities and Exchange Commission and
the FBI resolve charges that Jefferies failed to properly
supervise traders who cheated clients that took part in a
federal program to kick-start bond markets after the 2008
"Jefferies management in the fixed income division learned
of the fraud and did nothing to stop it, let alone report it,"
FBI special agent in charge of the New Haven, Connecticut unit
Patricia Ferrick said in a statement. "Such egregious conduct
supports the $25 million dollar penalty and underscores the need
to investigate and prosecute all responsible parties."
Richard Khaleel, a Jefferies spokesman, declined to comment.
The payout includes $14 million of fines and $11 million of
restitution to customers, authorities said.
Now part of Leucadia National Corp, Jefferies agreed
to a non-prosecution agreement with U.S. Attorney Deirdre Daly
in Connecticut, in exchange for its cooperation and improved
oversight of its employees.
Its settlements are among the first to address misconduct in
the aftermath of the 2008 financial crisis.
They were announced five days after jurors in New Haven,
Connecticut found former Jefferies trader Jesse Litvak guilty on
all 15 counts he faced for allegedly defrauding clients on
mortgage bond trades.
"Not only did management tolerate these illegal practices,
but the culture within the division encouraged the fraudulent
conduct," Daly said in a statement. "Our investigation of
LITVAK GUILTY VERDICT
Prosecutors accused Litvak of cheating clients out of more
than $2 million from 2009 to 2011 by inflating prices, lying
about how much Jefferies paid for bonds, and inventing sellers.
They said the United States was a victim because some
clients had traded through an initiative to energize the
mortgage bond market, and which was created through the $700
billion bailout known as the Troubled Asset Relief Program,
Lawyers for Litvak said throughout the trial that their
client's activity was considered normal at Jefferies and common
in the bond industry, and that Jefferies left him alone until a
major client objected and threatened to pull its business.
The defendant is expected to appeal his conviction. He had
worked in a Jefferies office in Stamford, Connecticut.
In January, the government had disclosed that it was
investigating fraud in the trading of residential
mortgage-backed securities, including in transactions stemming
from the bailout.
The SEC, in papers relating to the civil settlement, said
Jefferies had a policy that required supervisors to review
traders' communications in order to flag misleading information
provided to customers.
But it said these supervisors did not cross-check these
communications against actual trades, or review Bloomberg group
chats through which some misrepresentations were made.
"Had Jefferies better targeted its supervision to the risks
faced by its mortgage-backed securities desk, many of the
misstatements made by its employees could have been caught," SEC
enforcement director Andrew Ceresney said in a statement.