A former Jefferies Group Inc JEF.N managing director has been charged with defrauding a federal bank bailout program and investors in mortgage securities by falsifying prices and the identities of sellers, in a bid to make more money for his employer, U.S. authorities said on Monday.
The criminal case against Jesse Litvak, a former senior trader on Jefferies' trading floor in Stamford, Connecticut, is the first under a 2009 law banning "major fraud" against the United States through the Troubled Asset Relief Program, TARP Special Inspector General Christy Romero said on a conference call.
Investigators said Litvak's scheme generated more than $2.7 million of revenue for Jefferies and defrauded a variety of public and private funds. They said these funds included participants in the Public-Private Investment Program designed to revive the moribund market for mortgage-backed securities.
Among the defrauded investors were funds set up by AllianceBernstein Holding LP (AB.N), BlackRock Inc (BLK.N), George Soros' Soros Fund Management LLC, Daniel Loeb's Third Point LLC, and Wellington Management Co, the government said.
U.S. Attorney David Fein in Connecticut, who announced the criminal charges, described Litvak's conduct as "reprehensible," and said the investigation is ongoing.
Authorities said Litvak, 38, was arrested without incident at his New York home on Monday, and later pleaded not guilty to 16 criminal charges before U.S. Magistrate Judge Holly Fitzsimmons in Bridgeport, Connecticut.
Bail was set at $1 million, and Litvak's case was assigned to U.S. District Judge Janet Hall in New Haven. A tentative trial date was set for May 6. The U.S. Securities and Exchange Commission filed related civil charges.
Patrick Smith, a partner at DLA Piper representing Litvak, said his client looks forward to clearing his name at trial.
"Jesse Litvak did not cheat anyone out of a dime," Smith said in a statement. "In fact, most of these trades turned out to be hugely profitable."
Jefferies fired Litvak in December 2011, brokerage industry records show. The New York-based company was not charged with wrongdoing. A spokesman, Richard Khaleel, declined to comment.
MOUNTING TRADING LOSSES
Litvak was accused of misrepresenting prices of residential mortgage-backed securities in trades he helped arrange, and keeping the differences between the prices paid by buyers and paid to sellers.
He was also accused of inventing a fictional third-party seller for some trades of bonds that were in Jefferies' own inventory. Prosecutors said this let him charge commissions to which he was not entitled.
According to prosecutors, Litvak used the trades to help offset a plunge in his overall trading revenue, a factor in his compensation. They said he lost more than $10 million on trading in 2011, compared with a profit of more than $40 million in 2009.
Litvak was charged with 11 counts of securities fraud, one count of TARP fraud, and four counts of making false statements. Each securities fraud count has a maximum 20-year prison term.
According to brokerage industry records, Jefferies fired Litvak on December 21, 2011, after concluding that he had not been "forthright" with a customer in executing a trade.
A customer complaint about trades involving Litvak was settled last March for $2.24 million, the records show. Litvak joined Jefferies in April 2008.
Romero said her office, which examines TARP and other kinds of financial fraud, has been responsible, along with other law enforcement authorities, for criminal charges against 121 people.
The cases are U.S. v. Litvak, U.S. District Court, District of Connecticut; and SEC v. Litvak in the same court, No. 13-00132.
(Editing by Gerald E. McCormick, Nick Zieminski, Jim Marshall and Matthew Lewis)