Ex-Jefferies Director Faces Jury in TARP Fraud Case
Former Jefferies & Co. managing director Jesse Litvak defrauded investors of $2 million using a U.S. bank bailout program to earn illegal profit for the firm, prosecutors said at the start of his trial.
Litvak “was not truthful with his clients,” Assistant U.S. Attorney Eric Glover told a federal jury yesterday in New Haven, Connecticut, during his opening statement. “They trusted him. He secretly pocketed the difference for himself and his firm.”
Litvak is the only person charged with fraud in connection with an initiative to distribute more than $20 billion from the Troubled Asset Relief Program, or TARP, which used bailout funds to spur investment in mortgage-backed securities issued before 2009 that remained on the books of financial institutions. He’s accused of misrepresenting how much sellers were asking for the securities, or what customers would pay, keeping the difference for Jefferies.
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 (MS) and fund bailouts of companies including American International Group Inc. (AIG) and General Motors Co., will ultimately cost taxpayers $21 billion, the Congressional Budget Office has estimated.
Litvak’s arrest in January 2013 predated a wider probe into mortgage-backed securities at banks including JPMorgan Chase & Co. (JPM) 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.
The allegations against Litvak “couldn’t be further from the truth,” Patrick Smith, an attorney with DLA Piper LLP, said yesterday in his opening statement. “Jesse Litvak sold his customers, smart professional money managers, great bonds at great prices. The best prices available on the day of each trade. Nobody was overcharged and nobody overpaid.”
Litvak, 39, 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 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 is also accused in a Securities and Exchange Commission lawsuit of defrauding investors in more than 25 trades over two years.
Glover, the prosecutor, said the alleged fraud came to light when Michael Canter of AllianceBernstein received an e-mail from a sales representative with a spreadsheet mistakenly attached detailing Litvak’s trades and realized “he had paid more than he thought.”
“Mr. Canter was angry,” Glover said. “He could see from that spreadsheet that Mr. Litvak had not been truthful.”
Litvak admitted to Canter that he hadn’t been truthful, and Canter told his traders not to do business with Jefferies or Litvak and reported the matter to the Treasury Department, Glover said.
Residential mortgage-backed securities “can be complex, but what Mr. Litvak did here was not,” Glover said. “Although the environment may be complex, the crime is a simple one. Mr. Litvak lied to his clients.”
Litvak, originally from Denver, is a married father of two children who graduated from Emory University in Atlanta in 1997, Smith said. Dozens of relatives and family members packed the courtroom for yesterday’s proceedings
Smith said Litvak’s customers used computer models to determine the best prices for the bonds they purchased and didn’t care about sales tactics. Litvak used common sales pitches and his statements were “like water off a duck’s back” to customers such as Canter, Smith said.
“Jefferies’ profits were not even a factor when they did these smart analytics with these smart computer models” that are used to determine how much to pay for bonds, Smith said. “The central problem with this case is that it is built around a fiction and the fiction was that the bond was available at a lower price.”
Smith said nobody was offering bonds at lower prices and the government can’t prove losses in the case. Litvak wasn’t misrepresenting sellers’ prices and was doing “what a trader is supposed to do.”
“Anyone on Wall Street would understand what the evidence is going to show, that there’s absolutely nothing wrong with that,” Smith said. “Everyone did their job exactly as expected.”
Litvak’s tactics were a “part of Jefferies’ sales culture” and were practiced by supervisors and other traders, Smith said. The firm fired him in order to preserve its relationship with Canter and AllianceBernstein.
Jefferies “did everything it could to protect the mothership and make Jesse look like a rogue trader,” Smith 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.
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.
Jefferies in January 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.”
The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).
To contact the reporter on this story: Chris Dolmetsch in federal court in New Haven, Connecticut at firstname.lastname@example.org; John Dillon in federal court in New Haven, Connecticut
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