A former Jefferies & Co. managing director charged with defrauding customers out of $2 million using tactics one U.S. official said were worthy of a used-car salesman, is the subject of a novel trial tied to the $700 billion Wall Street bailout.
A jury was chosen today in federal court in New Haven, Connecticut, to decide the case of Jesse Litvak, charged with fraud in connection with the U.S. program that used bailout funds to spur investment in mortgage-backed securities. Litvak allegedly misrepresented how much sellers were asking for the securities, or what customers were willing to pay, keeping the difference for Jefferies. Litvak is the only person to face charges related to the program. The facts of his case may not be unique.
“It’s kind of a garden variety high-pressure sales tactics case,” Yale Law School Professor Jonathan Macey said in an interview. “While the investments were complicated, the lies weren’t that complicated that this guy is alleged to have told.”
Litvak’s arrest predated a wider probe into mortgage-backed securities at banks including JPMorgan Chase & Co. and UBS AG. Those firms received U.S. requests for information about trades during the financial crisis, people familiar with the probe said. Litvak, of Manhattan, was indicted in January 2013 on charges of securities fraud, making false statements and fraud connected to Troubled Asset Relief Program.
Litvak pleaded not guilty and has been free on $1 million bond. He faces as long as 20 years in prison if convicted of securities fraud, the most serious count, at his trial before U.S. District Judge Janet C. Hall. He was also sued by the Securities and Exchange Commission for defrauding investors in more than 25 trades over two years.
Opening statements in the case are to begin Feb. 18. Hall has set aside about two weeks for the trial.
A 1997 graduate of Emory University in Atlanta, Litvak joined Jefferies’ Stamford, Connecticut, office in April 2008 after more than a decade at RBS Greenwich Capital in Greenwich, according to Financial Industry Regulatory Authority records. A customer complained to Jefferies in November 2011 that it had been overcharged for some mortgage-backed securities, according to the regulator. Federal prosecutors said the firm fired Litvak the following month.
The government accused him of defrauding customers, including private investors and funds established by the Treasury Department in response to the financial crisis.
Litvak is also accused of telling some buyers that the bonds in Jefferies’s inventory were being offered for sale by a third-party seller that didn’t exist. Prosecutors said the claim allowed Litvak to charge an extra commission and increase the profitability of his trades as his trading revenue declined.
“The kind of false claims made by Mr. Litvak repeatedly were unfit for a used car lot let alone the marketplace for mortgage-backed securities,” George Canellos, deputy director of the SEC’s enforcement division, said at the time of Litvak’s arrest.
Litvak’s defense attorney, Patrick J. Smith of DLA Piper in New York, has said the trades were between “sophisticated market participants” with profits within industry norms, and that his client “didn’t cheat anyone out of a dime.”
There were no commissions on any of the trades, which turned out to be “hugely profitable,” Smith has said.
The allegation that Litvak defrauded any counterparty is untrue, said the lawyer, who declined to comment ahead of the trial.
Pools of home loans securitized into bonds were a central part of the housing bubble that burst, helping send the U.S. into the biggest recession since the 1930s. The largest global banks lost billions of dollars on mortgage-backed debt as U.S. home prices plunged and the market for such assets dried up.
While the securities rebounded after the crisis, markets remained illiquid with wide spreads between bids from buyers and sellers. Congress authorized the $700 billion rescue in October 2008. TARP, which spent $428 billion to stabilize banks including Citigroup Inc. (C) and Morgan Stanley and fund bailouts of companies including American International Group Inc. and General Motors Co., will ultimately cost taxpayers $21 billion, the Congressional Budget Office estimated in May.
Litvak is the only person charged with fraud in connection with the Public-Private Investment Program, which used more than $20 billion in TARP funds to spur investments in mortgage-backed securities issued before 2009 that remained on the books of financial institutions.
More than 100 firms applied to manage one of the nine funds established under the program. Each of those selected received $1.4 billion to $3.7 billion of bailout money to invest along with private capital. The program’s entire portfolio was liquidated as of Dec. 31, according to the office of Christy Romero, the special inspector general for TARP.
JPMorgan, the biggest U.S. lender by assets, disclosed the federal probe of its use of the funds in an August filing, saying it received subpoenas and requests for information from the SEC, the special inspector general for TARP and the U.S. Attorney’s Office in Connecticut. Barclays Plc, Citigroup, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley and Royal Bank of Scotland Plc are also under scrutiny in the probe, according to the Wall Street Journal.
Jefferies last week agreed to pay $25 million to settle U.S. probes of suspected abuses in the trading of mortgage-backed securities. New York-based Jefferies, which was acquired by Leucadia National Corp. (LUK) last year, said the investigation “arose from a matter that came to light in late 2011, at which time we terminated a mortgage-backed securities trader who was then indicted.”
Litvak is the only person who has been charged under a provision of a 2009 law that expanded the U.S. major-fraud statute to make it illegal to defraud the government in connection with TARP and other stimulus programs.
He is being prosecuted in coordination with the RMBS Working Group, a joint federal-state initiative to probe misconduct related to residential mortgage-backed securities. A total of 174 people have been charged with crimes related to TARP, 122 of whom have been convicted, according to the TARP inspector general.
“The government is trying to market this case as a response to the mortgage crisis, but the same kind of fraud that is alleged here could occur with any kind of security,” Macey said. “There’s nothing unique to mortgage-backed securities, other than that it happened to be a mortgage-backed security that was the subject of this person’s alleged misrepresentations.”
The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).
To contact the editor responsible for this story: Michael Hytha at firstname.lastname@example.org.