A former Jefferies & Co. managing director accused of lying to customers about bond prices had his fraud conviction overturned in the latest blow to the government’s effort to hold individuals accountable for alleged wrongdoing on Wall Street.
A federal appeals court Tuesday threw out Jesse Litvak's March 2014 conviction for lying to buyers and sellers of mortgage-backed securities. The court said there wasn't enough evidence to show Litvak's misstatements were relevant. The trial court was also faulted for excluding expert testimony from the defense.
The decision may put a damper on the government's attempts to rein in questionable tactics employed in trading of asset-backed debt. The U.S. Justice Department and the Securities and Exchange Commission have been using Litvak as a model for building more securities fraud cases, people with knowledge of the probes have said.
The reversal immediately threatens at least one criminal case — that of Matthew Katke, a former Royal Bank of Scotland trader of collateralized loan obligations who pleaded guilty in March to fraud and agreed to cooperate with prosecutors. Katke's agreement allows him to withdraw his plea if Litvak won his appeal.
Kannon Shanmugam, an attorney representing Litvak in the appeal, didn't immediately return a telephone message left at his office seeking comment. Thomas Carson, a spokesman for U.S. Attorney Deirdre Daly in Connecticut, said his office is reviewing the decision.
Katke's case brought to light a new strategy for investigators who are trying to clean up markets for the type of complex debt that helped cause the financial crisis, and showed how regulators are looking past the mortgage-backed securities at the heart of the meltdown.
His plea followed suspensions at Wall Street banks as regulators increasingly scrutinize asset-backed debt trades. Royal Bank of Scotland, JPMorgan Chase & Co., Morgan Stanley and Barclays have put traders on leave amid the inquiries.
In November, three former Nomura Holdings Inc. traders were accused of defrauding investors by inflating the prices of mortgage-backed securities. They deny wrongdoing.
Tactics of traders in many markets for securitized debt such as collateralized loan obligations — securities that are backed by high-yield corporate debt — are now under the microscope after escaping the stigma that accompanied mortgage-backed bonds following the financial crisis.
Litvak was convicted by a federal jury in New Haven, Connecticut, after a month-long trial before U.S. District Judge Janet C. Hall and sentenced to two years in prison. He was accused 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 Jefferies.
He was the first person convicted of fraud tied to the Troubled Asset Relief Program bailout that followed the financial crisis and is the only person to be found guilty of fraud tied to the Public-Private Investment Program, which used TARP funds to encourage investments in mortgage securities following the 2008 financial crisis.
His case raised questions about how much trickery is allowed on Wall Street, with witnesses testifying that the tactics he employed were common among traders of asset-backed securities.
Litvak didn't dispute that he made misstatements, arguing at trial that they weren't material and he didn't think the other parties in the transactions would be harmed because he was selling the bonds at "fully disclosed and agreed upon fair prices" that stayed below Jefferies' threshold for 4% profit.
He argued in his appeal that his conviction could be used to prosecute any business involved in simple negotiations, including car dealers. Former Securities and Exchange Commission Deputy Director George Canellos said after Litvak's January 2013 arrest that his tactics were "unfit for a used-car lot."
