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Jefferies Agrees to Pay $25M in RMBS Trading Probe

JAN 28, 2014 1:09pm ET
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Jefferies Group LLC, the investment bank owned by Leucadia National Corp., agreed to pay $25 million to settle U.S. criminal and civil probes of suspected abuses in the trading of mortgage-backed securities after the financial crisis.

The deal includes a non-prosecution agreement with the U.S. attorney’s office in Connecticut, Jefferies said today in a regulatory filing. The company will pay $11 million to counterparties harmed in certain trades, $10 million to the U.S. attorney’s office and $4 million to resolve a parallel investigation by the Securities and Exchange Commission, subject to the agency’s final approval.

The largest global banks lost billions of dollars on mortgage-backed debt during the financial crisis as U.S. home prices plunged and the market for such assets dried up. While the securities rebounded after the crisis, markets remained illiquid with wide spreads between bids from buyers and sellers.

New York-based Jefferies said the investigation “arose from a matter that came to light in late 2011, at which time we terminated a mortgage-backed securities trader who was then indicted” in January of last year. Spokesman Richard Khaleel said the company “cooperated extensively” with investigators.

John Nester, a spokesman for the SEC, and Thomas Carson, a spokesman for the U.S. attorney’s office in Hartford, Conn., declined to comment.

Ex-Jefferies & Co. managing director Jesse Litvak was arrested in January 2013 over charges that he defrauded customers of more than $2 million on trades of residential mortgage-backed securities from 2009 to 2011. Prosecutors accused Litvak of misrepresenting sellers’ asking prices to buyers, or vice versa, keeping the difference for Jefferies.

Litvak pleaded not guilty. Patrick Smith, his attorney at law firm DLA Piper, declined to comment on the settlement.

Prosecutors said Litvak’s victims include investment funds, among them six established by the U.S. Treasury Department as part of its response to the financial crisis.

Federal authorities are reviewing possible trading abuses at other banks including JPMorgan Chase & Co. and UBS AG, said two people briefed on the matter in January.

Deferred- or non-prosecution agreements are common tools for the government to resolve criminal allegations against a company without the ramifications of an indictment. The accords often serve as a form of probation and require the companies to take remedial actions such as bolstering compliance programs.

JPMorgan signed a non-prosecution agreement in January to resolve criminal and civil allegations it failed to stop Bernard Madoff’s Ponzi scheme. HSBC Holdings Plc, UBS and Wells Fargo & Co. have also signed such agreements over unrelated conduct.

Jefferies today reported seven days of trading losses in the fiscal fourth quarter. The bank recognized $23.2 million of costs tied to the case in the fourth quarter of fiscal 2013, according to the filing.

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