Ex-Jefferies Trader Lied to Customers, U.S. Tells Jury

Former Jefferies & Co. trader Jesse Litvak lied to customers to increase his profit, a prosecutor told a jury in the only fraud case against an individual in connection with a U.S. program that used bailout funds to spur investment in mortgage-backed securities.

Litvak “lied for money” and deprived customers of the chance to get the best prices, Assistant U.S. Attorney Jonathan Francis said today in federal court in New Haven, Connecticut, during closing arguments. “He wasn’t happy with the profits he made in his trades so he lied to his customers. That is not a sales tactic. It’s a crime. It’s fraud.”

Litvak, 39, of Manhattan, is accused of misrepresenting how much sellers were asking for securities and what customers would pay, and pocketing the difference for Jefferies. He’s the only person charged with fraud related to 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.

Jurors began deliberations today before U.S. District Judge Janet C. Hall sent them home for the evening. They are scheduled to return to court tomorrow.

Litvak’s arrest predated a wider investigation 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.

Sales Tactics

Litvak’s attorney, Patrick Smith, said his client sold bonds at fair prices determined by professional money managers who knew that traders sometimes used sales tactics to get them to pay higher prices.

“He stayed within the rules at Jefferies,” Smith told the jury today. “He used tactics that were approved by Jefferies and, as we learned in this case, were widespread on Wall Street.”

Litvak didn’t testify in his trial, which began Feb. 3 with jury selection before U.S. District Judge Janet C. Hall. Opening statements began two weeks later.

A 1997 graduate of Emory University in Atlanta, Litvak joined Jefferies’s Stamford, Connecticut, office in April 2008 after more than a decade at RBS Greenwich Capital, according to Financial Industry Regulatory Authority records. He was fired in December 2011.

Settled Probes

Litvak was indicted 13 months later on charges of securities fraud, making false statements and fraud connected to TARP. He denies wrongdoing and faces as long as 20 years in prison if convicted of securities fraud.

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

Pools of home loans securitized into bonds were a central part of the housing bubble, which burst and helped 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.

Other Traders

Francis told jurors they shouldn’t pay attention to arguments by Smith that other traders at Jefferies practiced the same sales tactics or that supervisors knew about the behavior and condoned it.

“You shouldn’t be concerning yourselves with people who may be defendants in a future criminal trial,” Francis said. “It doesn’t matter whether people at Jefferies knew what Jesse Litvak was doing or were in on it with him.”

Smith compared the case to a pickup basketball game where players understand that they aren’t supposed to call “ticky-tack” fouls on each other. Smith said prosecution witness Michael Canter, head of the securitized assets group at AllianceBernstein Holding LP (AB), is like a player in the game who decides he’s had a “hard foul” and calls in a referee -- the special inspector general for TARP.

Actual Prices

Prosecutors said a spreadsheet mistakenly sent to Canter showed the prices that Jefferies actually paid for bonds and led to the criminal investigation against Litvak.

“The problem with bringing SIGTARP in to referee the game is they don’t understand the rules,” Smith said. “They don’t understand the culture of Wall Street. They don’t understand that everyone does it to each other and it’s OK.”

Assistant U.S. Attorney Eric Glover, in his rebuttal, said the more apt comparison was to professional basketball.

“At the very least, it’s the NBA and there needs to be a referee,” Glover said, pointing at Litvak. “He needs a referee because he committed foul after foul after foul.”

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 federal court in New Haven, Connecticut, 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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