Feb. 25 (Bloomberg) -- Ex-Jefferies & Co. trader Jesse Litvak’s former customers told a jury during his fraud trial in Connecticut that lies and misrepresentations are a common part of the give-and-take of bond trading.
Litvak, 39, is on trial in New Haven federal court 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.
Joel Wollman, a portfolio manager with QVT Financial LP, testified yesterday that he told Litvak that his firm’s limit for a bond purchase was 57 cents on the dollar because anything more than that wouldn’t provide a 10 percent yield.
Under cross-examination from John Hillebrecht, one of Litvak’s attorneys, Wollman said he told another broker that he’d get a 10 percent yield at 58 cents on the dollar, and that he wasn’t telling the whole truth to Litvak.
The charges against Litvak include claiming a third party was selling the bonds when Jefferies was the actual holder.
Assistant U.S. Attorney Jonathan Francis subsequently asked Wollman to expand on his statements regarding bond yields, and “whether or not it was possible you weren’t giving Mr. Litvak accurate information.”
“I don’t recall at that time what yield I thought it was so because I couldn’t prove it was necessarily that yield a lot of things are possible,” Wollman said, according to a copy of the trial transcript. “By lying is certainly one of them. Although I consider myself a pretty truthful person.”
Francis asked him about his earlier testimony where Litvak’s lawyer had questioned him on “‘shading the truth.’”
“Is the price that you purchase the bond at the kind of information that you shade when you are then telling someone the price you bought the bond at?” Francis asked, later adding: “Would you change that information as part of your negotiation?”
“Would I change that, I could, I don’t,” said Wollman.
“Why don’t you?” Francis asked.
“I was being transparent,” Wollman responded.
‘Might Have Lied’
After an objection, Wollman continued, saying “I might have lied about that if I were let’s say trying to extract additional profit in that trade or I shouldn’t say I would because generally I try to be truthful.”
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 used bailout funds to spur investment in mortgage-backed securities issued before 2009 that remained on the books of financial institutions.
Unlike some debt such as corporate bonds, information about trades of mortgage bonds without government-backing aren’t publicly disclosed. Since the financial crisis, the Financial Industry Regulatory Authority has been expanding its Trace reporting system to include securitized debt.
Another of Litvak’s former customers, Vladimir Lemin of Magnetar Capital LLC, said yesterday under cross-examination from Patrick Smith, another attorney representing Litvak, that he had to take possible misrepresentations from the other side into account when doing deals.
In a transaction with Magnetar, Litvak is accused of creating a fake seller of bonds that Jefferies already owned, lying about the price that it had already paid and pocketing the markup.
“You want the other guy to believe something that may not be entirely accurate,” Smith asked Lemin, Magnetar’s assets manager. “Isn’t that the case?”
“It is one of the strategies,” Lemin said. “For what I do in mortgages, it is appropriate to use skepticism.” The perception that the other side either withholds information or tells falsehoods “is exactly why I don’t say, ‘How high?’ when they tell me to jump,” Lemin said.
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.
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, Financial Industry Regulatory Agency records state.
His arrest in January 2013 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 previously said.
Opening statements in Litvak’s trial began Feb. 18 and prosecutors have said they expected to rest their case as soon as today. Smith has said he intends to put on a defense that will last about three days. He hasn’t said whether Litvak will testify in his own defense.
Litvak’s alleged victims include six funds established by the Treasury Department in 2009 as part of its response to the financial crisis, and private investment funds, prosecutors have said.
TARP, which spent $428 billion to stabilize banks including Citigroup Inc. 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 has estimated.
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.
The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).
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