SEC Charges Jefferies LLC with Failing to Supervise Its Mortgage-Backed Securities Desk during Financial Crisis (with Lofchie Comment)

The SEC charged global investment bank and brokerage firm Jefferies LLC with failing to supervise employees at its mortgage-backed securities desk who had lied to customers about pricing.

The SEC found that Jefferies representatives, including Jesse Litvak, whom the SEC charged with securities fraud last year, lied to customers about the prices that the firm paid for certain mortgage-backed securities, thus misleading customers about the true amount of profits being earned by the firm in its trading. Jefferies' policy required supervisors to review the electronic communications of traders and salespeople in order to flag any untrue or misleading information provided to customers. However, the policy was not implemented in a way to detect misrepresentations about price.

In addition to paying a monetary penalty, the SEC ordered Jefferies to retain a compliance consultant to evaluate and recommend improvements to its policies for the mortgage-backed securities desk.

Lofchie Comment: Compliance officers and supervisors should establish a policy as to how a trader must respond to counterparties who ask how much the trader paid for a particular security. The lesson of this case is that it may be prudent to establish a "no comment" policy.

See: SEC Order; SEC Press Release.Related news: Former Portfolio Manager Loses Appeal in Insider Trading Cases (with Bondi Comment) (February 21, 2014).