A federal grand jury in New Haven, Conn. has returned a 16-count indictment charging Jesse C. Litvak of New York, with securities fraud, Troubled Asset Relief Program (TARP) fraud, and making false statements to the federal government, announced United States Attorney for the District of Connecticut David B Fein and Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Christy Romero. The indictment alleges that Litvak, while a registered broker-dealer and managing director at Jefferies & Company 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.
The indictment was returned on Jan. 25, 2013 and Litvak was arrested at his home this morning by SIGTARP agents. This prosecution has been brought in coordination with the RMBS Working Group and relates to alleged fraud committed against the government in response to the financial crisis through the pooling and sale of RMBS. The RMBS Working Group is a joint federal and state initiative created last year to investigate those responsible for misconduct contributing to the financial crisis. RMBS were pools of mortgages deposited into trusts and then sold as securities to investors who were to receive a stream of income from the mortgages packaged in the RMBS.
“As alleged, the defendant defrauded six funds established by Treasury and funded principally with government bailout money,” said United States Attorney Fein. “Illegally profiting from a federal program designed to assist our nation in recovering from one of our worst economic crises is reprehensible. I commend SIGTARP for its diligent work on this ongoing investigation. The United States Attorney’s Office and our RMBS Working Group partners are committed to investigating fraud and abuse that helped lead to the 2008 financial crisis, as well any fraud related to the government’s response to the crisis.”
As detailed 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 & Company Inc ., a global securities and investment banking firm headquartered in New York. Jefferies also has a trading floor in Stamford, Conn., where Litvak and other members of its Mortgage and Asset-Backed Securities trading group worked. The indictment alleges 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. 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. Through these schemes, it is alleged that Litvak defrauded six PPIP funds and multiple private investment funds of a total of more than $2 million. The indictment charges 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.