Ex-Jefferies Trader’s Customers Say Deals Were Still Good

Photographer: Douglas Healey/Bloomberg

Jesse Litvak, a former managing director at Jefferies & Co., right, exits federal court with his attorney Patrick Smith, left, in New Haven, Connecticut on Feb. 18, 2014. Close

Jesse Litvak, a former managing director at Jefferies & Co., right, exits federal court... Read More

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Photographer: Douglas Healey/Bloomberg

Jesse Litvak, a former managing director at Jefferies & Co., right, exits federal court with his attorney Patrick Smith, left, in New Haven, Connecticut on Feb. 18, 2014.

Customers of former Jefferies & Co. managing director Jesse Litvak told a jury during his fraud trial that they still got good deals on the bonds they bought through him even with his alleged misrepresentations.

Litvak, 39, is on trial in federal court in New Haven, Connecticut, accused of defrauding investors of $2 million by lying on trades of mortgage-backed securities. He’s the only person charged with fraud in connection with an initiative to distribute more than $20 billion from the Troubled Asset Relief Program, which the U.S. government created during the 2008 credit crisis to help bail out banks.

Alan Vlajinac, a bonds trader at Wellington Management Co., testified yesterday that he was disappointed to learn that he had bid $76 for a bond that Jefferies had bought for $74, saying he had trusted Litvak.

Vlajinac said under cross-examination by Litvak’s attorney, Patrick Smith of DLA Piper LLP, that he achieved “best execution” on the deal -- meaning he paid the best available price for the bond.

“Would I do it again at $76, just based on price? Probably,” Vlajinac said.

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.

Wide Spreads

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 used bailout funds to spur investment in mortgage-backed securities issued before 2009 that remained on the books of financial institutions.

TARP, which spent $428 billion to stabilize banks including Citigroup Inc. and Morgan Stanley (MS) and fund bailouts of companies including American International Group Inc. and General Motors Co., will ultimately cost taxpayers $21 billion, the Congressional Budget Office has estimated.

Brian Norris, a portfolio manager at Invesco Ltd. in Louisville, Kentucky, testified his firm agreed to pay $80 for a bond from a third-party seller that was supposed to include a $54,763 profit for Jefferies, prosecutors said. Invesco later learned that Litvak had bought the bonds a week earlier at a lower price and earned almost $128,000 on the deal, Norris said.

Promising Yields

Norris said his firm uses sophisticated models to determine how much to pay for bonds and that the yields for a bid handled by Litvak looked promising. Nothing Litvak said or did affected Invesco’s decision to do the deal, Norris said.

“The investment analysis of it does not change,” Norris said.

Litvak, a native of Denver who graduated from Emory University in Atlanta, was hired by Jefferies in April 2008 and was fired on Dec. 21, 2011, according to his indictment. He previously worked for RBS Greenwich Capital, according to records of the Financial Industry Regulatory Agency.

His arrest in January 2013 predated a wider probe into mortgage-backed securities at banks including JPMorgan Chase & Co. and UBS AG. (UBSN) Those firms received U.S. requests for information about trades during the financial crisis, people familiar with the probe previously said.

Vlajinac and Norris’s testimony followed that of Michael Canter, head of the securitized assets group at AllianceBernstein Holding LP. (AB)

Trade Spreadsheet

Canter told the jury that he received an e-mail from a colleague of the trader in November 2011 that mistakenly contained a spreadsheet detailing a history of bond trades at Jefferies. The document showed that Litvak had misled Canter about how much Jefferies had paid for bonds, including one instance where Canter agreed to raise a bid at Litvak’s request, yet Jefferies paid the original price.

Canter said Litvak apologized to him after being confronted following a long weekend, saying it was a “hard year” and that “guys were doing whatever they needed” to make money. Canter said he was “very angry” and started yelling at Litvak.

Assistant U.S. Attorney Eric Glover said during opening statements that the spreadsheet sent to Canter brought Litvak’s alleged fraud to light, while Smith said Jefferies fired his client in order to make him look like a “rogue trader” and preserve its relationship with Canter and AllianceBernstein.

Penalty Box

Canter told the jury that he put Jefferies in “the penalty box” after confronting Litvak in November 2011, stopped doing business with the firm for about a month and hasn’t done much with Jefferies since.

Canter acknowledged under cross-examination from Smith that the price AllianceBernstein paid for the bonds was the best available that day.

“Isn’t it true that you’d do the trade again at that price?” Smith asked.

“Yes,” Canter replied.

Litvak, of Manhattan, was indicted the same month he was arrested on 10 counts of securities fraud, four counts of making false statements and one count of fraud connected to TARP. He pleaded not guilty and was freed on a $1 million bond. He’s also been sued by the U.S. Securities & Exchange Commission.

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, which began with jury selection Feb. 3. Opening statements began Feb. 18 and prosecutors have said they expected to rest their case next week.

Litvak Defense

Smith said yesterday he intends to present a three-day defense. He didn’t provide details on the witnesses he intends to call or indicate whether his client intends to take the stand. With the jury absent, Hall yesterday reminded Litvak that he has the right to remain silent or testify on his behalf.

Litvaks’s alleged victims include six funds established by the U.S. Treasury Department in 2009 as part of its response to the financial crisis, and private investment funds, prosecutors have said.

More than 100 firms applied to manage one of the nine funds established under the TARP initiative known as the Public-Private Investment 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.

New York-based Jefferies, acquired by Leucadia National Corp. last year, agreed in January to pay $25 million to settle U.S. probes of suspected abuses in the trading of mortgage-backed securities.

The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).

To contact the reporters on this story: Chris Dolmetsch in New York State Supreme Court at cdolmetsch@bloomberg.net; John Dillon in federal court in New Haven, Connecticut, at jdillon@snet.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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