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Jefferies pays $25 million to settle MBS trading probes

Jonathan Stempel and Aruna Viswanatha
Tuesday, 28 Jan 2014 | 4:34 PM ET

* Leucadia unit settles with U.S. Justice Dep't, SEC

* Ex-Jefferies trader faces Feb. 18 TARP fraud trial

Jan 28 (Reuters) - Jefferies Group LLC has agreed to pay $25 million to settle U.S. criminal and civil probes into purchases and sales of mortgage-backed securities after the 2008 financial crisis.

In a regulatory filing Tuesday, the Leucadia National Corp unit said it reached a nonprosecution agreement with the U.S. Attorney in Connecticut and a civil settlement with the U.S. Securities and Exchange Commission, subject to that agency's approval.

Jefferies said it will pay a $10 million fine to the U.S. Attorney's office, a $4 million fine to the SEC, and $11 million to counterparties harmed by suspect trades.

The financial crisis caused fixed-income markets to dry up for all but the safest, most liquid securities, causing hundreds of billions of dollars of losses worldwide. Many mortgage securities remained hard to trade after markets improved.

While much of the U.S. Department of Justice's focus on mortgage securities abuses has concerned debt sold before the crisis, federal prosecutors in Connecticut this month said the government is probing transactions linked to the $700 billion federal bailout known as the Troubled Asset Relief Program.

Jefferies said the probes it was resolving arose from a matter that surfaced in late 2011, when it terminated a mortgage-backed securities trader who was indicted by the U.S. Attorney in Connecticut in January 2013 and separately charged by the SEC in a civil complaint.

That description fits Jesse Litvak, a former Jefferies trader who was indicted for allegedly defrauding customers on post-crisis residential mortgage-backed securities trades.

Litvak has pleaded not guilty, and faces a Feb. 18 trial in a federal court in New Haven, Connecticut, with jury selection to begin on Feb. 3. His lawyer Patrick Smith, a partner at DLA Piper, declined to comment.

Thomas Carson, a spokesman for Acting U.S. Attorney Deirdre Daly in Connecticut, declined to comment, as did SEC spokesman John Nester. Jefferies spokesman Richard Khaleel declined to comment. Leucadia and Jefferies are based in New York.

Nonprosecution agreements can let companies resolve allegations of wrongdoing without facing formal charges.

'MAJOR FRAUD'

Litvak's case was the first brought under a 2009 law banning "major fraud" against the United States through TARP.

Prosecutors accused Litvak of cheating customers out of more than $2 million on trades from 2009 to 2011, by lying about the prices he paid and inventing an imaginary seller of bonds that Jefferies already held.

They said Litvak did this to boost Jefferies' revenue and offset trading losses, both factors in his compensation.

Prosecutors said the United States was a victim because some of the bond buyers had taken part in TARP's Public-Private Investment Program, which was intended to help rebuild a market for troubled mortgage debt.

Litvak has said the mark-ups charged on his bonds were within industry norms, and that his alleged victims were sophisticated enough to decide whether the prices were fair. He had worked in a Jefferies office in Stamford, Connecticut.

Jefferies said it recognized $23.2 million of costs related to the probes in its fiscal fourth quarter ending last Nov. 30.

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