NEW HAVEN, Conn.—A former managing director of an investment bank was arrested Monday on charges he defrauded investment funds the Department of Treasury established in 2009 as part of the federal government's response to the financial crisis.

A federal grand jury in Connecticut returned a 16-count indictment charging 38-year-old Jesse C. Litvak of New York City with securities fraud, Troubled Asset Relief Program fraud and making false statements to the federal government, prosecutors said.

The indictment alleges Litvak, while a registered broker-dealer and managing director at Jefferies & Co., Inc. who worked on the company's trading floor in Stamford, engaged in a scheme to defraud customers on residential mortgage-backed securities trades.

"As alleged, the defendant defrauded six funds established by Treasury and funded principally with government bailout money," U.S. Attorney David Fein said. "Illegally profiting from a federal program designed to assist our nation in recovering from one of our worst economic crises is reprehensible."

Authorities say Litvak defrauded the six funds and private investment funds of more than $2 million. According to the indictment, Litvak was terminated from the company in 2011.

Litvak pleaded not guilty Monday in U.S. District Court in Bridgeport. His attorney, Patrick J. Smith, denied he defrauded anyone.

"These were principal transactions between sophisticated market participants," Smith said in a statement. "All of the profits that Jefferies earned on each trade were well within industry norms for the mortgage-backed bonds in this case. Jesse Litvak did not cheat anyone out of a dime. In fact, most of these trades turned out to be hugely profitable."

The indictment alleges Litvak misrepresented asking and selling prices, keeping the difference between the price paid by the buyer and the price paid to the seller for Jefferies. In other transactions, Litvak misrepresented to the buyer that bonds held in Jefferies' inventory were being offered for sale by a fictitious third-party seller, which allowed Litvak to charge the buyer an extra commission that Jefferies was not entitled to, authorities said.

"As most Americans tried to keep their heads above water during the financial crisis, Jesse Litvak is charged with trying to profit from the taxpayer-funded bailout known as TARP," said Special Inspector General for TARP Christy Romero. "The charges paint a picture of Litvak shamelessly lying to dupe the government into overpaying for mortgage securities with bailout funds."

The indictment charges Litvak with 11 counts of securities fraud, which carry up to 20 years in prison on each count, one count of TARP fraud, which carries a maximum term of imprisonment of 10 years, and four counts of making false statements, which each carry a maximum prison term of five years if convicted.