Ex-Jefferies Trader Litvak Convicted of Defrauding Buyers

Former Jefferies & Co. Managing Director Jesse Litvak was convicted in the only criminal case against an individual in connection with a U.S. program that used bailout funds to spur investment in mortgage-backed securities.

Litvak, 39, of New York, was found guilty by a federal jury yesterday of all counts including securities fraud and making false statements as well as fraud connected to the U.S. government’s Troubled Asset Relief Program following a trial before U.S. District Judge Janet C. Hall in New Haven, Connecticut. He is scheduled to be sentenced May 30.

Litvak is the only person to have been charged with fraud in relation to the Public-Private Investment Program, an initiative that used more than $20 billion from TARP to spur investment in mortgage-backed securities that stayed on the books of financial institutions.

“We’re gratified the jury delivered the verdict that it did and justice was served,” Assistant U.S. Attorney Eric Glover said.

The conviction may further government efforts to prosecute other traders and banks related to the 2008 finanancial crisis and its aftermath. When asked if charges against others were likely, Glover said the investigation is “ongoing and active” and declined to comment further.

Other Traders

During closing arguments, Assistant U.S. Attorney Jonathan Francis told jurors they shouldn’t pay attention to arguments by the defense 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.”

Litvak didn’t speak yesterday as he walked out of the courtroom. His wife, Renee, buried her head in her hands and his mother, Nancy, cried as the verdict was read. Jurors declined to speak to reporters outside the courthouse after the verdict.

“Mr. Litvak is obviously very disappointed in the verdict,” his lawyer, Patrick Smith, said. “We plan to appeal. We think the court made several serious errors that undermined Mr. Litvak’s ability to present his full defense.”

$2 Million

Prosecutors accused Litvak of defrauding investors of $2 million by misrepresenting how much sellers were asking for the securities, or what customers would pay, and keeping the difference for New York-based Jefferies. Richard Khaleel, a spokesman for Jefferies, declined to comment on the verdict.

Litvak was also accused of defrauding investors by telling some buyers that the bonds in the Jefferies 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.

Smith said the judge didn’t allow the testimony of expert witnesses who would have testified about the mortgage-backed securities markets and would have shown Litvak’s “good faith state of mind,” and also made several evidentiary rulings limiting the amount of evidence about similar behavior of other Jefferies traders and employees.

Alleged victims included six funds established by the U.S. Treasury Department in 2009 as part of its response to the financial crisis, and private investment funds.

Home Loans

Jefferies, which was acquired by Leucadia National Corp. last year, in January agreed to pay $25 million to settle U.S. probes of suspected abuses in the trading of mortgage-backed securities. The deal includes a non-prosecution agreement with the U.S. Attorney’s Office in Connecticut.

The repackaging of home loans into bonds was blamed for contributing to the deepest U.S. recession since the 1930s. As home prices plunged, the market for the mortgage-backed securities dried up, costing banks billions of dollars. While the securities rebounded, markets remained illiquid, with wide spreads between bids from buyers and sellers.

Congress authorized a $700 billion rescue in October 2008. TARP, which spent more than $400 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.

Wider Probe

Litvak’s arrest and indictment 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.

More than 100 firms applied to manage one of the nine funds established under the Public-Private Investment Program. Those selected each 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.

“Trading in mortgage securities can be a complicated business, but what the defendant did was simple -- he lied to, defrauded, and illegally overcharged customers out of pure greed to benefit Jefferies and himself,” Romero said yesterday in a statement. “Some of those customers were taxpayers who funded the TARP bailout.”

Denver Native

A native of Denver, Litvak is a father of two. He graduated from Emory University in Atlanta in 1997. He began his career at RBS Greenwich Capital in June 1997 and joined Jefferies’s Stamford, Connecticut, office in April 2008.

“Jesse is a moral and upstanding human being, not at all like other people charged with the same crimes,” his first cousin, Michael Litvak, said in an e-mail after the verdict. “He is a decent, honest person, not at all like your typical ’Wolf of Wall Street’ character.”

Litvak faces as long as 20 years in prison on securities fraud and as much as 10 years on the TARP fraud charge. He was also sued by the U.S. Securities and Exchange Commission, which accused him of defrauding investors in more than 25 trades over two years.

Prosecutors called a dozen witnesses over about six days, including about a half-dozen of Litvak’s former customers, some of whom said that lies and misrepresentations are a common part of the give-and-take of bond trading.

One former customer, Michael Canter, head of the securitized assets group at AllianceBernstein Holding LP, testified that he discovered Litvak was lying to him when he was mistakenly e-mailed 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 in which Canter agreed to raise a bid at Litvak’s request, while Jefferies paid the original price.

Expanded System

Unlike data on debt securities 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.

Canter testified that he put Jefferies in “the penalty box” after confronting Litvak in November 2011. He said he stopped doing business with the firm for about a month and hasn’t done much with it since because he doesn’t trust the company.

Glover said Litvak’s fraud came to light when Canter reported his behavior to the Treasury Department after receiving the spreadsheet and realizing “he had paid more than he thought.”

Client’s Tactics

Defense attorneys argued that their client’s tactics were a part of the sales culture at Jefferies and were practiced by supervisors and other traders. Smith, Litvak’s defense lawyer, who is with DLA Piper LLP, told the jury his client’s customers were “smart professional money managers” who paid the best prices available.

Smith said Litvak’s customers used computer models to determine the best prices for the bonds they bought and didn’t care about sales tactics. The firm fired Litvak to preserve its relationship with Canter and AllianceBernstein and to make Litvak seem like a “rogue trader,” Smith said.

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

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