March 7, 2014 11:39 pm

Former Jefferies bond trader convicted

A former Jefferies bond trader was convicted on Friday of lying about the price of mortgage bonds to defraud investors, including a US government programme set up to stablise the financial system.

Jesse Litvak was found guilty on 16 counts of securities fraud. He is the first person to be charged over the Troubled Asset Relief Program, which was set up in the aftermath of the financial crisis to encourage investors to unclog bank balance sheets by buying “toxic” assets.

Mr Litvak, 39, was accused of lying about the market price of bonds when trying to sell them on to potential buyers. He sometimes invented “ficitious sellers”, the government said, to persuade investors to buy bonds at inflated prices and boost Jefferies’ profit and his own pay.

One fraud count was connected to the Tarp fund, introduced in 2008 to stabilise the financial system. One element of Tarp was the public-private investment partnership, which took $20bn of government funds to match private investment from institutions buying distressed mortgage assets.

His lawyer said Mr Litvak would appeal against the verdict. He faces up to 20 years in prison on each count.

Prosecutors alleged that from 2009 to 2011 Mr Litvak defrauded six investment funds established by the US Treasury Department to buy troubled mortgage-backed securities.

The affected public-private investment funds, which were backed by $20bn of US taxpayer money, were managed by AllianceBernstein, BlackRock, and Invesco. Other alleged victims, according to prosecutors, were hedge funds Magnetar Capital, Third Point, Soros Fund Management, and mutual fund company Putnam Investments. AllianceBernstein allegedly overpaid more than $900,000, according to the Securities and Exchange Commission, which filed civil fraud charges.

An unnamed Jefferies supervisor allegedly knew about some of the mispricings, according to the indictment.

Mr Litvak was fired from Jefferies in December 2011 after the broker concluded that he was “not forthright with a customer” about trade execution, according to a regulatory filing. One month earlier, a customer complained that it had been charged higher commissions on mortgage securities, according to the filing, and Jefferies agreed to pay $2.2m to resolve the matter in March 2012.

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