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Litvak Jurors Told It's 'Trust But Verify' in MBS Market

Former Jefferies LLC managing director Jesse Litvak "lied to his customers" about the prices of mortgage-backed securities, a prosecutor told jurors as the U.S tries for a second time to win a conviction that sticks.

Moments later at the start of the trial in New Haven, Conn., a defense lawyer said Litvak traded with the "most sophisticated decision makers in the world" and didn't deceive them. Chatroom conversation that jurors will see is akin to that "heard at a local used car dealer," defense lawyer Dane Butswinkas said.

Litvak was found guilty in 2014, but an appeals court tossed out his conviction saying the judge was wrong in not letting expert witnesses testify for the defense. Litvak will again argue that he dealt with professionals who conduct their own research and know the value of the bonds they buy and sell.

"The evidence will show Jesse Litvak lied," Assistant U.S. Attorney Heather Cherry said Thursday.

Traders are watching the case closely to see whether the "everyone does it" defense prevails. Two former Royal Bank of Scotland Group employees who admitted guilt to similar charges can withdraw the pleas if Litvak wins. A former Cantor Fitzgerald & Co. trader was indicted in December and three former Nomura Holdings Inc. dealers are set to go on trial in about two months. It remains to be seen whether the Justice Department will keep pursuing such cases after Donald Trump becomes president.

The U.S. has cracked down on traders over mortgage-bond pricing, bringing at least seven criminal fraud cases in the past three years, as dozens of others left their jobs or were forced out amid a wave of investigations. Those charged are accused of overstating the prices their companies paid for a bond to get customers to pay more, or understating what buyers agreed to pay to get the clients to sell for less.

Litvak "was caught" when a customer obtained a spreadsheet showing he had been mislead about bond pricing, Cherry said. She said such tactics are illegal, even when dealing with "sophisticated investors."

Michael Canter, head of the securitized asset group at AllianceBernstein Holding, testified 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.

"Our relationship has never recovered from the incident we’re here today about," Canter said. "The trust was never rebuilt."

Butswinkas said Litvak's sales techniques were legal and common in the industry.

The bond market is "closed off to you and me" and often involves shady practices and less-than-truthful information, Butswinkas said. Former President "Ronald Reagan's saying 'trust but verify' would be an understatement," he said.

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