Former Jefferies & Co. managing director Jesse Litvak was convicted for a second time of defrauding customers on trades of mortgage-backed securities — but only on one of 10 criminal counts.
On the sixth day of deliberations Friday, a federal jury in New Haven, Conn., found Litvak guilty of one count of securities fraud following a trial that began Jan. 4. He was acquitted of nine counts.
Litvak displayed no emotion when the verdict was presented. As jurors read out the first three not-guilty counts, family members in the courtroom squeezed each other’s hands and smiled. The mood changed sharply when the single guilty count was read out. Litvak hugged family members and declined to comment as left he the courtroom. Jurors also declined to comment as they were leaving court.
The case has been closely watched by bond traders. While Litvak admitted lying to customers, his lawyers argued during both trials that his misrepresentations weren't important enough to his counterparts to influence their decisions to buy or sell bonds. Litvak's first conviction, in which he was found guilty on all 15 counts, was reversed on appeal in December 2015.
The appeals court ruled Litvak should have been allowed to present expert witnesses to bolster his defense. At the retrial, Litvak's attorney offered one expert witness to explain that bond traders are sophisticated market professionals backed by substantial research capabilities and are likely to be skeptical about statements made about pricing during negotiations.
Bond Trades
Litvak's arrest in January 2013 led to scrutiny of the way mortgage bonds and other securitized debt is traded. Since then, at least six other individuals have been charged and dozens have been suspended or forced to resign over similar allegations.
Prosecutors said Litvak "was caught" when a customer obtained a spreadsheet showing he had been misled about bond pricing. Michael Canter, head of the securitized asset group at AllianceBernstein Holding, testified for the prosecution that he stopped doing business with Litvak and Jefferies in 2011 after obtaining the spreadsheet. He said the data showed he had overpaid for bonds, hurting his firm's investors.
Defense attorney Dane Butswinkas told jurors that the government "was not even close" to proving beyond a reasonable doubt that Litvak's lies had significantly altered the total mix of information customers used to decide on bond transactions.
Phillip R. Burnaman II, a former portfolio manager at ING Bank, who managed a $500 million portfolio at ING, testified for the defense that it's common for bond traders to lower bids in an effort to get a better price.
"It's a bit like playing poker and bluffing," said Burnaman, who is now chief risk officer with hedge fund Dendera Capital.
Closely Watched
The case has been monitored by participants in the market, especially those involved in other cases.
In March 2015, a former Royal Bank of Scotland Group trader, Matthew Katke, pleaded guilty to a conspiracy to commit securities fraud and agreed to cooperate with prosecutors. About six months later, three former Nomura Holdings Inc. were charged with defrauding investors by inflating the prices of mortgage bonds. And the same month that the appeals court reversed Litvak's conviction, another former RBS trader, Adam Siegel, pleaded guilty to similar conduct.
Both Katke and Siegel are watching the Litvak case, as their agreements allow them to withdraw their pleas if he is ultimately found to have not violated the law. The three former Nomura traders are scheduled to go on trial in May.
A former Cantor Fitzgerald & Co. mortgage-bond trader, David Demos, was indicted last month on fraud charges for allegedly lying to customers.
