Second Circuit Vacates|Trader’s Fraud Conviction

(CN) - A former trader convicted of lying to investors about mortgage-backed securities prices is entitled to a new trial, the Second Circuit ruled.

In 2013, the U.S. Securities and Exchange Commission charged Jesse Litvak, a trader with the investment bank Jefferies LLC fka Jefferies & Co., with securities fraud, claiming that he lied to customers about prices the firm paid for mortgage-backed securities so he could resell them at a higher profit for Jefferies.

Some of these customers were Public-Private Investment Funds, or PPIFs, entities established by the federal government under the Emergency Economic Stabilization Act of 2008.

PPIFs were partnerships between the U.S. Treasury Department and private investors established to purchase troubled assets, particularly residential mortgage-backed securities which plunged in value during the 2008 financial crisis.

Jefferies & Co. paid $25 million last year to settle charges of failure to supervise traders at its mortgage-backed securities desk.

A jury found Litvak guilty of securities fraud after a 14-day trial in early 2014. He was sentenced to two years in prison, three years supervised release, and ordered to pay a $1.75 million fine.

But the Second Circuit reversed Litvak's conviction Tuesday, finding that "the evidence adduced at trial provided an insufficient basis for a rational jury to conclude that his misstatements were material to the Department of the Treasury."

While Litvak's misstatements may have inflated the Treasury's investments via the PPIFs, "the government submitted no evidence that Litvak's misstatements were capable of influencing a decision of the Treasury," Judge Chester Straub wrote for a three-judge panel. (Emphasis in original.)

Even if the Treasury bought the securities at slightly higher prices due to Litvak's actions, the government did not show that it would not have bought the securities at all due to the price differential, the judge ruled.

The trial court also abused its discretion in excluding the testimony of Litvak's expert witness, Ram Willner, about the process by which investment managers value residential mortgage-backed securities, and the likely impact on the final purchase price, according to the 84-page opinion.

Without Willner's testimony, Litvak was "left only with the 'victims' of his conduct as sources of potential testimony on this issue, an odd limitation where the jury is to evaluate materiality in an objective manner," Straub wrote.

The New York City-based appeals court ordered the lower court to hold a new trial on Litvak's securities fraud charges.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit