How Jefferies’ compliance failed in mortgage fraud case

Compliance officers had better things to do?

The Securities and Exchange Commission charged global investment bank and brokerage firm Jefferies & Co. on Wednesday with failing to supervise its employees on its mortgage-backed securities desk who were lying to customers about pricing.

Last week a jury convicted Jesse Litvak, a registered broker-dealer and former managing director at Jefferies, of multiple offenses involving a scheme to defraud customers trading in residential mortgage-backed securities. He was convicted of, among other charges, ten counts of securities fraud, one count of defrauding TARP, and four counts of making false statements within the jurisdiction of the United States government.

Bloomberg News, which was inadvertently drawn into the case as Litvak was often making misrepresentations in Bloomberg group chats, has a look at two reasons those in charge of compliance at Jefferies failed in their duty.

But what about the Securities and Exchange Commission's $25 million settlement with Litvak's employer, Jefferies LLC, for failing to supervise him?1 You might as well start with what Jefferies was supposed to do to supervise Litvak, but didn't. That's at paragraphs 9-13 of the SEC order. Basically Jefferies made two errors:

While it had policies to review its traders' electronic communications, and sampled communications to review "both randomly and based on language-specific searches," its review did not include Bloomberg group chats, and Litvak did some of his misrepresenting on those chats.

While it reviewed communications (other than Bloomberg chats), it "failed reasonably to implement this procedure for review of communications in a manner that would reasonably be expected to detect the misrepresentations about purchase price made by Litvak and other representatives2 on Respondent’s MBS desk."

3d rendering of a row of luxury townhouses along a street

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