Jesse C. Litvak, 38, of New York, was arrested today at his home and charged with 16 counts including securities fraud, fraud connected with the Troubled Asset Relief Program and making false statements to the federal government, Connecticut U.S. attorney David Fein said in a statement.
Alleged victims include “numerous” investment funds, among them six established by the U.S. Treasury Department in 2009 as part of its response to the financial crisis, according to the statement. Litvak also defrauded private investment funds, according to the statement.
“Illegally profiting from a federal program designed to assist our nation in recovering from one of our worst economic crises is reprehensible,” Fein said in the statement.
Litvak is charged with 11 counts of securities fraud and may face as long as 20 years in prison on each count if convicted. He is also charged with one count of TARP fraud, which carries a maximum penalty of 10 years in prison, and four counts of making false statements to the government, each punishable by as much as five years in prison.
A customer complained to Jefferies in November 2011 that it had been overcharged for some mortgage-backed securities, according to Financial Industry Regulatory Authority records, which didn’t identify the customer. Jefferies settled the case in March for $2.2 million, according to the records.
Litvak was hired by Jefferies in April 2008 and was fired on Dec. 21, 2011, according to the indictment. He previously worked for RBS Greenwich Capital, according to FINRA’s records.
Litvak said in a Delaware Chancery Court filing in October that he was under investigation by the U.S. attorney for Connecticut, the Office of the Special Inspector General for the Troubled Asset Relief Program, FINRA and the Securities and Exchange Commission. He is seeking money from Jefferies to cover his legal fees. The firm said in a court filing that the matter should be resolved in arbitration.
The SEC today filed a lawsuit against Litvak in federal court in Connecticut, accusing him of defrauding investors in more than 25 trades from 2009 to 2011.
“Every Jefferies counterparty in each transaction in this indictment got the exact bond bargained for at a price each wanted to pay,” Patrick J. Smith, an attorney with DLA Piper in New York who is representing Litvak, said in a statement.
“These were principal transactions between sophisticated market participants,” Smith said. “There were no ‘commissions’ on any of these trades. All of the profits that Jefferies earned on each trade were well within industry norms for the mortgage- backed bonds in this case.”
Litvak didn’t “cheat anyone out of a dime,” Smith said.
“In fact, most of these trades turned out to be hugely profitable,” Smith said. “The allegation that Jesse defrauded any counterparty—PPIP or private—is simply untrue. Jesse looks forward to the trial in this case so that his name can be cleared and he can get on with his career.”
Richard Khaleel, a spokesman for New York-based Jefferies, declined to comment on the case.
“The kind of false claims made by Mr. Litvak repeatedly were unfit for a used car lot let alone the marketplace for mortgage-backed securities,” George Canellos, deputy director of the SEC’s enforcement division, said today on a conference call. “Some of Litvak’s customers were sophisticated investors, but the law does not allow you to lie to some types of investors and not others. All investors are entitled to truthful and complete information.”
Litvak pleaded not guilty before U.S. Magistrate Judge Holly Fitzsimmons in Bridgeport, Conn., and was released on a $1 million bond pending a May 6 appearance before U.S. District Judge Janet Hall in New Haven, Fein said today in a conference call with reporters.
The Treasury Department started the Legacy Securities Public-Private Investment Program in 2009 in response to the financial crisis, using more than $22 billion of TARP bailout funds to help the market for investments including residential mortgage-backed securities, according to Fein’s statement.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.
More than 100 firms applied to manage one of the nine funds established under the program, and each received $1.4 billion to $3.7 billion of bailout money to invest along with private capital, according to Fein’s statement.
Litvak is accused of misrepresenting the asking price of sellers of residential mortgage-backed securities to buyers or vice versa, keeping the difference for Jefferies, according to Fein’s statement.
Litvak is also accused of misrepresenting to buyers in other transactions that the bonds in Jefferies’s inventory were being offered for sale by a fake third-party seller, according to Fein’s statement.
The fake seller was created by Litvak, allowing him to charge an extra commission that Jefferies wasn’t entitled to, according to Fein’s statement.
Litvak’s trading revenue “steadily declined” each year he was at Jefferies, from a profit of more than $40 million in 2009 to a loss of more than $10 million in 2011, and his scheme “increased the profitability of his trades,” according to the indictment.
Mortgage-bond salesmen usually charge a commission of between 4 ticks—4/32 of 1%—and 8 ticks on trades where they act as middlemen to match a buyer and a seller, according to the indictment. Litvak in some cases earned profits of as much as 6%.
Litvak is being prosecuted in coordination with the RMBS Working Group, a joint federal and state initiative started last year to probe misconduct related to the financial crisis, according to Fein’s statement.
A total of 121 people have been charged with crimes related to TARP. Litvak is the first to be charged under a 2009 law that makes it illegal to defraud the government in relation to TARP, said Christy Romero, special inspector general for the program.
Congress authorized $700 billion for the financial rescue in October 2008, and President George W. Bush signed the bill into law. TARP, which spent $418 billion to stabilize banks including Citigroup Inc. and Morgan Stanley and fund bailouts of companies such as American International Group Inc. and General Motors Co. , will ultimately cost taxpayers $24 billion, the Congressional Budget Office estimated in October.