In March 2014, Jefferies bond trader Jesse Litvak was convicted for committing a fraud on the United States of America by lying to his customers’ asset managers, who were hired by the government to deploy billions of dollars of TARP funds intended to bail out the banks that were “too big to fail.”  In December 2015, the United States Court of Appeals for the Second Circuit reversed the convictions and remanded the case for a new trial.  Either the door is now open for bond traders to lie or federal prosecutors now have a road map to prove their case – or both.

The Court of Appeals rejected Litvak’s arguments that, with respect to his securities fraud convictions, his misrepresentations to trading counterparties about bond price – as opposed to bond value – were not material, and that he had no intent to harm. Id. at *35, 47.  Explaining that the question of materiality is “well suited for jury determination,” the court noted that “several of his counterparties’ representatives testified at trial that they considered the misrepresentations meaningful…and that they or their employers were harmed by Litvak’s misleading course of conduct.” Id. at *36, 43.  However, the court remanded the case for a new trial, holding that the exclusion of Litvak’s expert witness testimony was not harmless error.  The court explained that former business professor and finance expert Ram Willner’s testimony “in respect of the process by which investment managers value RMBS (residential mortgage backed securities) and the likely impact on the final purchase price of a broker’s statements made to a counterparty…would have been highly probative of materiality.” Id. at *57.

In other words, the court found that this expert testimony could have helped the jury decide whether Litvak’s lies about the prices his firm paid for the bonds he was trading would have really mattered to a counterparty, or whether the buyers’ “own sophisticated valuation methods and computer model” are what truly mattered.  The court also ruled that the evidence introduced at trial did not provide a sufficient basis for a rational jury to conclude that Litvak’s misstatements were material to the Department of the Treasury. United States v. Litvak, No. 14-2902-cr at *32-33 (2d Cir. Dec. 8, 2015) (noting that while Litvak’s misstatements may have been “relevant” they did not rise to the level of influencing a Treasury decision).

The Litvak decision stops short of establishing a bright-line rule as to whether and when false statements by bond traders rise to the level of criminality.  Rather, the determination of whether Litvak’s particular falsehoods were material is a question for the jury, and he is entitled to have that jury hear his expert’s opinion on the subject.

For more information, read the Court’s full opinion here.

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