By CHRISTIAN NOLAN

An investment bank with offices in New York and Stamford has reached a $25 million settlement with the federal government to settle civil and criminal allegations for misleading customers trading in residential mortgage-backed securities.

Of the $25 million, the U.S. Attorney’s Office in Connecticut announced that Jefferies LLC will pay up to $11 million in restitution to victims and up to $4.2 million to the U.S. Securities and Exchange Commission.

Acting Connecticut U.S. Attorney Deirdre Daly said employees in Jefferies’ fixed income division repeatedly misled customers.

“The sole purpose of this deception was to increase profit to Jefferies and its employees,” said Daly. “Not only did management tolerate these illegal practices, but the culture within the division encouraged the fraudulent conduct.”

In response to the 2008 financial collapse, the U.S. Department of Treasury introduced the Legacy Securities Public-Private Investment Program and used more than $22 billion from the Troubled Asset Relief Program to reinvigorate the trading markets for many troubled securities, including certain kinds of residential mortgage-backed securities, or RMBS.

RMBS are pools of mortgages deposited into trusts and then sold as securities to investors who receive a stream of income from the mortgages.

The program created nine public-private investment program funds and more than 100 firms applied to manage the funds. The Troubled Asset Relief Program infused between $1.4 billion and $3.7 billion into the nine funds, which were to be invested alongside private capital.

Jefferies’ Mortgage and Asset-Backed Securities Trading group bought and sold RMBS on the secondary market. In 2009, certain Jefferies employees fraudulently increased the profitability of RMBS trades for Jefferies in various ways, including by misrepresenting sellers’ and buyers’ asking prices. According to the government, they then pocketed the difference in the money collected from the buyer and promised to the seller.

Jefferies’ employees also sold bonds after inventing a fictitious third-party seller, which created an extra commission that Jefferies would not have been entitled to because it was selling bonds it held in its own inventory, authorities said.

At times, according to prosecutors, members of Jefferies’ management in the fixed income division became aware that Jefferies employees were making misrepresentations to customers and did nothing to stop it.

On March 7, a federal jury in New Haven found Jesse Litvak, a registered broker-dealer and former managing director at Jefferies, guilty of multiple offenses involving a scheme to defraud customers trading in RMBS.

Specifically, Litvak was found guilty by the jury of securities fraud, Troubled Asset Relief Program fraud and making false statements to the federal government. Prosecutors say he siphoned off over $2 million in private investment funds and government bailout money.

Litvak was the first person in the U.S. convicted of a crime related to a program that used federal bailout funds to restart trading markets for mortgage-backed securities. He was found guilty of 10 counts of securities fraud, a charge that carries up to 20 years in prison on each count. He is scheduled to be sentenced May 30.

Litvak’s attorney, Patrick Smith, denied the allegations, telling the jury his client sold bonds at great prices to sophisticated buyers. He said Litvak engaged in typical sales tactics and followed company rules. He said the government couldn’t prove any losses.

Litvak, 39, worked on Jefferies’ trading floor in Stamford. He was terminated from the company in 2011.

Under the terms of the settlement to avoid prosecution between the company and federal authorities, Jefferies agreed to pay a total of $25 million. The amount includes up to $11 million in restitution to victims and a nearly $4.25 million penalty to the SEC. Jefferies also agreed to address deficiencies in the compliance and ethics practices and policies of its Mortgage and Asset-Backed Securities Trading group. Specifically, Jefferies agreed to retain an independent compliance consultant to conduct a review of its policies and procedures for detecting and preventing fraud in connection with the purchase or sale of RMBS.

In a news release, the U.S. Attorney’s Office in Connecticut noted that the settlement addresses only the corporate liability of Jefferies LLC, not potential criminal charges for any individual. The criminal investigation of individuals associated with Jefferies’ RMBS trading activities remains active and ongoing, prosecutors said. Jefferies has cooperated with the federal criminal investigation.

“By entering into this agreement, Jefferies recognized the seriousness of the problem and committed to change,” Daly said in a statement. “While our investigation of individuals continues, we agreed to this corporate resolution in order to reflect the company’s cooperation and to avoid further damage to its many blameless employees and shareholders. Broker-dealers are on notice that lying to customers to increase profits is a crime, and are strongly encouraged to root out and report such misconduct to avoid significant consequences.”

Jefferies, so far, has declined commenting on the case publicly. The investment bank’s lawyer, Boyd Johnson, at WilmerHale in New York, did not return calls seeking comment.

This matter was investigated by the Office of the Special Inspector General for the Troubled Asset Relief Program and the FBI. It is being prosecuted by Assistant U.S. Attorneys Jonathan Francis and Eric Glover.

The case was investigated in coordination with the RMBS Working Group, a joint federal and state initiative created to investigate those responsible for misconduct contributing to the 2008 financial crisis. The RMBS Working Group, which is chaired by U.S. Attorney General Eric Holder, brings together more than 200 attorneys, investigators, analysts and staff from dozens of state and federal agencies.