from the Securities and Exchange Commission (SEC)
The Securities and Exchange Commission today charged global investment bank and brokerage firm Jefferies LLC with failing to supervise employees on its mortgage-backed securities desk who were lying to customers about pricing.
An SEC investigation found that Jefferies representatives including Jesse Litvak, who the SEC charged with securities fraud last year, lied to customers about the prices that the firm paid for certain mortgage-backed securities, thus misleading them about the true amount of profits being earned by the firm in its trading. Jefferies’ policy required supervisors to review the electronic communications of traders and salespeople in order to flag any untrue or misleading information provided customers. However, the policy was not implemented in a way to detect misrepresentations about price.
Jefferies agreed to pay $25 million to settle the SEC’s charges as well as a parallel action announced today by the U.S. Attorney’s Office for the District of Connecticut. In a related criminal trial, Litvak was convicted last week of multiple counts of securities fraud and other charges. Said Andrew J. Ceresney, director of the SEC’s Division of Enforcement:
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. Other firms trading instruments like mortgage-backed securities should take note of the consequences of failing to do so, and should take this opportunity to tailor their own supervision.
Paul Levenson, director of the SEC’s Boston Regional Office, added:
Reviewing employees’ communications is a critical part of a brokerage firm’s supervisory responsibilities. This is particularly true when it concerns complex products like mortgage-backed securities in which customers have limited visibility into prices.
According to the SEC’s order instituting settled administrative proceedings, the supervisory failures occurred on numerous occasions from 2009 to 2011. Jefferies failed to provide direction or tools to supervisors on the mortgage-backed securities desk to meaningfully review communications to customers by Litvak and others about the price that Jefferies paid for mortgage-backed securities. Jefferies supervisors failed to check traders’ communications against actual pricing information, making it difficult to detect misrepresentations to customers. Supervisors on the mortgage-backed securities desk also did not review communications with customers that took place in Bloomberg group chats, where Jefferies traders and salespeople lied about pricing.
The SEC’s order finds that Jefferies failed to reasonably supervise Litvak and other representatives on its mortgage-backed securities desk as required by Section 15(b)(4)(E) of the Securities and Exchange Act of 1934. Jefferies agreed to settle the charges by making payments to customers totaling more than $11 million, which represents not just the ill-gotten gains of $4.2 million but the full amount of profits earned by the firm on these trades. Jefferies also agreed to pay a $4.2 million penalty to the SEC and an additional $9.8 million as part of a non-prosecution agreement with the U.S. Attorney’s office. The firm must retain a compliance consultant to evaluate and recommend improvements to its policies for the mortgage-backed securities desk.
The SEC’s investigation, which is continuing, has been conducted by Kerry Dakin of the Enforcement Division’s Complex Financial Instruments Unit as well as James Goldman, Rachel Hershfang, Rua Kelly, Kathleen Shields, and Kevin Kelcourse of the Boston Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).
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