(Bloomberg) -- Former Jefferies managing director Jesse Litvak, the only person convicted of fraud related to a $20 billion government bail-out program, may spend almost a decade in prison for lying to his customers about mortgage-backed securities.
Litvak was found guilty by a jury in March of securities fraud and making false statements, as well as fraud connected to the U.S. Treasury Departments Troubled Asset Relief Program. His conviction is the first in connection with the Public- Private Investment Program, an initiative that used TARP funds to spur investments in mortgage-backed securities after the 2008 financial crisis.
The case raised questions across Wall Street about just how much trickery is allowed in trading as witnesses at Litvaks trial testified that his tactics were common.
Litvak, 39, of New York, is scheduled to be sentenced today by U.S. District Judge Janet C. Hall in New Haven, Connecticut. Prosecutors have asked Hall to send the former trader to federal prison for nine years and have him pay a $5 million fine, saying he perpetrated a multi-year, multi-victim, multimillion-dollar securities fraud scheme.
Litvaks lawyers, meanwhile, have asked Hall to sentence their client to no more than 14 months in prison, saying hes a genuine, humble and selfless man whose actions didnt affect Jefferies customers investment decisions or their returns. They cited more than 100 supportive letters from family, friends, former colleagues and customers.
Jefferies agreed in January to pay $25 million to settle U.S. criminal and civil probes of suspected abuses in the trading of mortgage-backed securities. Other banks including New York-based JPMorgan Chase received requests for information from U.S. officials about mortgage-bond trading after Litvaks arrest, people briefed on the matter said in January.
Mortgage-bond traders at JPMorgan, Morgan Stanley and Royal Bank of Scotland Group were placed on leave after those inquiries.
Prosecutors and regulators said after Litvaks conviction in March that they were continuing to investigate mortgage-bond traders at Jefferies, saying that while the company cooperated once the scheme was discovered, he wasnt the only employee who lied to his customers.
According to Financial Industry Regulatory Authority records, Jefferies faced pressure from prosecutors to dismiss one of Litvaks supervisors, co-head of fixed income William Jennings, while they were investigating suspected trading abuses.
Jennings was permitted to resign on Jan. 27 after Jefferies learned that the U.S. Attorneys Office in Connecticut wouldnt settle with the company while he was still employed, according to Finra records. The investment bank, which is owned by Leucadia National Corp., reached its settlement the next day. Jennings hasnt been charged with wrongdoing.
David Zornow, a lawyer for Jennings at Skadden Arps Slate Meagher & Flom, previously declined to comment on Jennings and didnt immediately respond to an e-mail after regular business hours yesterday seeking comment on Litvaks sentencing.
The practice of bond dealers showing clients different prices for the same securities on electronic trading platforms has drawn scrutiny from the U.S. Securities and Exchange Commission, which is concerned that smaller investors are being penalized, a person with direct knowledge of the inquiry said in March.
SEC Chair Mary Jo White said last month that her agency wants retail bond investors to have the same access to privately negotiated bond prices as big institutions, allowing them to make better decisions about how much to pay for the securities.
Litvak was arrested in January 2013 on charges of defrauding investors of $2 million by misrepresenting how much sellers were asking for the securities, or what customers would pay, and keeping the difference for New York-based Jefferies.
Hall last month denied a request by Litvak to throw out his conviction, saying there was ample evidence that Litvak exploited the opacity of the RMBS market to his victims detriment and to the advantage of himself and Jefferies. Litvak still faces a separate lawsuit by the SEC.
The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access