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‘Failing to Supervise Employees’ Nets SEC Charges for Investment Bank

The Securities and Exchange Commission (SEC) announced Wednesday that it 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."

The announcement comes shortly after the conviction of a Jefferies' broker-dealer and former managing director, Jesse Litvak, on charges of securities fraud.

An SEC investigation found that Jefferies representatives, including Litvak, misrepresented to customers the prices of mortgage-backed securities (MBS) that the company had purchased.

An internal policy that required supervisors to review electronic communications of traders and sales people was not implemented in a way to monitor accurate price representations to customers.

The SEC alleged, "Jefferies supervisors failed to check traders' communications against actual pricing information, making it difficult to detect misrepresentations to customers."

A majority of the infractions occurred on multiple occasions from 2009 to 2011.

"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," said Andrew J. Ceresney, director of the SEC's Division of Enforcement. "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."

The investment bank has decided to pay a penalty, rather than go to trial.

"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 release said.

Furthermore, the firm has been ordered to retain a compliance consultant to evaluate and recommend improvements to its policies regarding the MBS desk.

About Author: Colin Robins

Colin Robins is the online editor for DSNews.com. He holds a Bachelor of Arts from Texas A&M University and a Master of Arts from the University of Texas, Dallas. Additionally, he contributes to the MReport, DS News' sister site.

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