ALLEGED INFLATION OF PERFORMANCE BY HEDGE FUND ADVISER LEADS TO SEC CHARGES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

Press Release

SEC Charges Hedge Fund Adviser With Deceiving Investors by Inflating Fund Performance

FOR IMMEDIATE RELEASE

2018-83

Washington D.C., May 9, 2018 —
The Securities and Exchange Commission today announced that it has charged New York-based investment adviser Premium Point Investments LP with inflating the value of private funds it advised by hundreds of millions of dollars.  The SEC also charged Premium Point’s CEO and chief investment officer Anilesh Ahuja as well as Amin Majidi, a former partner and portfolio manager at the firm, and former trader Jeremy Shor.

According to the SEC’s complaint, the scheme ran from at least September 2015 through March 2016 and relied on a secret deal where in exchange for sending trades to a broker-dealer, Premium Point received inflated broker quotes for mortgage-backed securities (MBS).  In addition, the defendants allegedly used “imputed” mid-point valuations, which were applied in a manner that further inflated the value of securities. This practice allegedly boosted the value of many of Premium Point’s MBS holdings and further exaggerated returns.  The complaint alleges that the defendants overstated the funds’ value in order to conceal poor fund performance and attract and retain investors.

“Investors rely on their investment advisers to fairly and accurately value securities, and that is especially true when the securities trade in opaque markets,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit.  “As we allege, Premium Point masked its true performance, which denied investors the opportunity to make informed investment decisions.”

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, charges the defendants with fraud, with aiding and abetting fraud, or both.  The SEC complaint seeks permanent injunctions, return of allegedly ill-gotten gains with interest, and civil penalties.

The U.S. Attorney’s Office for the Southern District of New York, which conducted a parallel investigation of this matter, today announced charges against Ahuja, Majidi, and Shor.

The SEC’s investigation, which is continuing, was conducted by H. Gregory Baker and Brian Fitzpatrick of the Asset Management Unit, Osman Nawaz of the Complex Financial Instruments Unit, and Preethi Krishnamurthy of the New York Regional Office under the supervision of Mark D. Salzberg of the Asset Management Unit.  The litigation is being conducted by Ms. Krishnamurthy, Mr. Baker, and Mr. Nawaz.  The SEC acknowledges the assistance and cooperation of the U.S. Attorney’s Office and the FBI in this matter.

MORTGAGE-BACKED SECURITIES DEALER SENTENCED TO PRISON

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Connecticut-Based Broker-Dealer Representative Sentenced to Two Years in Prison for Defrauding Investors in Mortgage-Backed Securities

SEC's Enforcement Division Institutes Proceedings to Determine Whether to Bar Him From Securities Industry

The Securities and Exchange Commission announced today that Jesse Litvak, a former managing director of Jefferies & Co., Inc. (Jefferies), a New York-based broker-dealer, was sentenced to 24 months in prison followed by three years of supervised release and a fine of $1,750,000 following his conviction on 10 counts of securities fraud, one count of Troubled Asset Relief Program (TARP) fraud, and four counts of making false statements. The judgment of conviction was entered against Litvak on July 25, 2014. Based on that judgment, the SEC's Enforcement Division instituted administrative proceedings against Litvak on September 2, 2014 to determine what, if any, remedial action is appropriate in the public interest against Litvak. Such action could include a bar from the securities industry.

The SEC had also charged Litvak separately in a civil action with making misrepresentations and engaging in misleading conduct while he sold mortgage-backed securities (MBS) in the wake of the financial crisis. The Commission's civil action against Litvak remains pending. In its civil complaint filed in District Court for the District of Connecticut on January 28, 2013, the SEC alleged that Litvak, a senior trader on Jefferies' MBS Desk who worked at Jefferies' office in Stamford, Connecticut, bought and sold MBS from and to his customers. According to the SEC's civil complaint, on numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, those customers about the price at which Jefferies had purchased the MBS before selling it to another customer and the amount of his firm's compensation for arranging the trades. The SEC alleged that, on some occasions, Litvak also misled his customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies' inventory. According to the SEC's civil complaint, Litvak also misled customers about how much money they were paying in compensation to Jefferies. The customers included investment funds established by the United States government in the wake of the financial crisis to help support the market for MBS as well as other investment funds, including hedge funds.

The SEC's complaint charged Litvak with violating the antifraud provisions of the federal securities laws, particularly Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933. The SEC's action has been stayed pending the outcome of the criminal proceedings.

SEC CHARGES JEFFERIES LLC WITH FAILING TO SUPERVISE EMPLOYEES

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today 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.

An SEC investigation found that Jefferies representatives including Jesse Litvak, who 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 them 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 customers.  However, the policy was not implemented in a way to detect misrepresentations about price.

Jefferies agreed to pay $25 million to settle the SEC’s charges as well as a parallel action announced today by the U.S. Attorney's Office for the District of Connecticut.  In a related criminal trial, Litvak was convicted last week of multiple counts of securities fraud and other charges.

“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.”

Paul Levenson, director of the SEC’s Boston Regional Office, added, “Reviewing employees’ communications is a critical part of a brokerage firm’s supervisory responsibilities. This is particularly true when it concerns complex products like mortgage-backed securities in which customers have limited visibility into prices.”

According to the SEC’s order instituting settled administrative proceedings, the supervisory failures occurred on numerous occasions from 2009 to 2011.  Jefferies failed to provide direction or tools to supervisors on the mortgage-backed securities desk to meaningfully review communications to customers by Litvak and others about the price that Jefferies paid for mortgage-backed securities.  Jefferies supervisors failed to check traders’ communications against actual pricing information, making it difficult to detect misrepresentations to customers.  Supervisors on the mortgage-backed securities desk also did not review communications with customers that took place in Bloomberg group chats, where Jefferies traders and salespeople lied about pricing.

The SEC’s order finds that Jefferies failed to reasonably supervise Litvak and other representatives on its mortgage-backed securities desk as required by Section 15(b)(4)(E) of the Securities and Exchange Act of 1934.  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 firm must retain a compliance consultant to evaluate and recommend improvements to its policies for the mortgage-backed securities desk.

The SEC’s investigation, which is continuing, has been conducted by Kerry Dakin of the Enforcement Division’s Complex Financial Instruments Unit as well as James Goldman, Rachel Hershfang, Rua Kelly, Kathleen Shields, and Kevin Kelcourse of the Boston Regional Office.    The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut and the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP).