Skip to content
Matt Levine

When Can Bond Traders Lie to Their Customers?

If everyone lies, then maybe the lies don't count.

Jesse Litvak is a former Jefferies bond trader who lied to his customers. Specifically, he traded residential mortgage-backed securities, and he would tell buyers of those securities inventive little stories about the prices he had paid for them. So for instance, a customer came to him and asked to buy some bonds, he described for the customer "a fictional back‐and‐forth between himself and an unnamed, non‐existent third‐party seller," and he ended by telling the customer that he'd paid $53.00 for the bonds. Then he charged the customer $53.25. The customer thought that Litvak had worked hard on his behalf and gotten paid a quarter for his efforts. But really Litvak had owned the bonds all along -- he'd bought them days earlier for $51.25 -- and made an undisclosed profit of $2.00.

The question is: Is this a crime? It might seem like lying to your customers would always be a crime, but that is not true at all. Lying to your customers is only a crime if it is fraud, and it is only fraud if the lies that you tell them are "material," and the lies are only material if there is "a substantial likelihood that a reasonable investor would find" them "important in making an investment decision." Lying to your customers about whether an investment is a Ponzi scheme is fraud. Lying to your customers about what color socks you are wearing probably isn't.