Former Jefferies Group trader Jesse Litvak was found guilty of defrauding clients on mortgage bond trades. This was a large victory for the government as its investigation into the big banks in the years after the financial crisis has finally found some guilty parties.
Mr. Litvak was found guilty on all 15 counts he faced. By the way, it’s really rare to find someone guilty on all counts; usually the defense can win on a couple of counts. This is a big loss for the defense.
Prosecutors tried Mr. Litvak on the counts of cheating clients out of more than $2 million by helping to inflate the price of mortgage bonds by lying about how much Jefferies Group paid for the bonds. Mr. Litvak even created a bogus trail of sellers to help with this fraud. This would, in turn, make Jefferies Group more money on the bonds, which would in turn help Mr. Litvak on his bonus.
The jury found Mr. Litvak guilty on the ten counts of securities fraud, which comes into play as the bonds were traded over the markets. The jury also found Mr. Litbak guilty on four counts of making false statements and a final counts of fraud connected to the Troubled Asset Relief Program (TARP).
Mr. Litvak faces up to twenty years in prison on EACH securities fraud count and his sentencing is scheduled for May 30.
Strangely, Jefferies Group (now a part of Leucadia National Corp.) was not charged in the case. This is interesting as it was the bank that directly benefited from the fraud by Mr. Litvak. Thus, it seems that either the bank worked out a deal earlier with prosecutors or the prosecuting team determined that Mr. Litvak was a “lone wolf.”
Unfortunately, I am not a big fan of the lone wolf defense. That’s because the internal controls of a bank should have immediately flagged the profit/loss being gained on the bond trades. When that is done, Mr. Litvak’s trades should have been significantly more than his peers. Thus, it seems that the internal compliance division was missing. Totally missing.
If they weren’t missing, then they were complicit in the fraud. Given the state of the market in 2008, well, you can make your own decision.