The SEC has commenced a civil enforcement action in the U.S. District Court for the Southern District of New York against three former traders who were working at a broker-dealer. The SEC asserts that, in connection with their purchases and sales of residential mortgage-backed securities (RMBS) and manufactured housing asset-backed securities, the defendants repeatedly lied to customers about the prices that potential sellers were asking for such securities; about the bids that potential buyers were making for such securities; and about the compensation that the broker-dealer would receive for brokering trades. The defendants have also been indicted on criminal securities and wire fraud charges in the U.S. District Court for the District of Connecticut. The case is a reminder that hedge fund managers should think twice before relying on pricing information provided by brokers with regard to thinly traded securities. This article summarizes the allegations set forth in the SEC complaint and the relief sought by the SEC. For discussion of another action involving alleged misrepresentations by a broker in connection with sales of RMBS, see “Puffery or Securities Fraud? Litvak Conviction Sheds Light on Permissible Bounds of Bond Sales Talk and the Evidentiary Power of Bloomberg Chats
,” Hedge Fund Law Report, Vol. 7, No. 11 (Mar. 21, 2014).