2014-01-09wsj.com

Regulators are investigating whether traders exploited the murky pricing around residential mortgage-backed securities from around 2009 through 2011 to buy or sell the investments at artificially depressed or inflated values, the people close to the inquiry said. The other parties in such transactions would typically be rival banks, hedge funds and other large investment firms.

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The inquiry into banks' postcrisis mortgage bond sales follows the arrest last year by Sigtarp agents of a former senior trader at Jefferies LLC. Federal prosecutors in Connecticut accused Jesse C. Litvak of defrauding investors, including funds linked to the bailout, in trades on residential mortgage-backed securities. The SEC, which filed a parallel civil-enforcement action, alleged that Mr. Litvak "repeatedly lied" to investors, inventing prices and pocketing the difference for his firm.

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The agency alleged that from 2009 through 2011, the former Jefferies trader lied about how much Jefferies had paid for the securities and sometimes pretended to be arranging a trade on behalf of another customer when in fact he was selling securities from the bank's own inventory. In one example, the SEC alleged the trader emailed an investor promising he was about to "go beat up" a fictitious outside seller of a bond owned by Jefferies. Shortly afterward, in a message that began "winner winner chicken dinner," he said that the concocted negotiation had yielded a better price.



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