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Conviction(s) Overturned! Bond Trader's Misrepresentations 'Immaterial'

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By Jonathan R. Tung, Esq. on December 18, 2015 2:48 PM

Ex-Jeffereies & Co. trader Jesse Litvak will get another day in court thanks to the ruling of the Second Circuit's Court of Appeals which essentially made Litvak a free man, at least temporarily.

The misrepresentation and fraud case has been one of the most followed cases on Wall Street in that it potentially marks the limitations of how far "materiality" can be stretched, and by whom.

How it All Began

Litvak was indicted in 2013 on allegations that he fraudulently misrepresented the true prices of some complex securities known as RMBs to a number of parties including Public-Private Investment Funds (PPIFs) which were the creation of the Treasury Department following TARP. In March of 2014, he was convicted on 10 counts of securities fraud and four counts of making false statements.

The False Statements Charges

The circuit court concluded that in order to convict based on fraud, the statements would have to be material. And what's more, materiality is also a question of whom is being influenced. What was critical here is that materiality had been up to this point thought of as being pan-objective, and that it only really mattered that a reasonable investor would find Litvak's misstatements material to their decision-making process. But the circuit court didn't care about that: it cared about Litvak's tendency to influence the "decision-making body" to which it was addressed. See the difference?

Thus, since it was already factually settled that the decision-making body here was the Treasury Department, the real hurtle for the government to prove was that Litvak's statements had to be have had a tendency to influence the Treasury, not some reasonable investor. In fact, Litvak was too far removed from Treasury officials to have influenced them at all -- he spoke to the PPIF managers. Since the government failed to show that the Department itself made any investment decisions, his convictions were reversed as to false statements and fraud against the United States.

The Securities Fraud Charges

With respect to the securities fraud charges, Litvak was also victorious, although in a less striking way. The circuit court found that Litvak was wrong in arguing that a reasonable juror could not have concluded that his statements were material to the investment decisions of the PPIF managers. It must have seen the facts differently from Litvak who found that the element of scienter was essentially missing.

Even though the court did not reverse the securities fraud convictions against Litvak, it still vacated the convictions against him on the grounds that the lower court should not have excluded Litvak's expert witness testimony by a college professor that detailed how much credence is generally given to sell-side bond traders (like Litvak). The court found that this testimony was directly relevant to whether Litvak's statements were material to the PPIF investors -- and were thus not "harmless error."

Out of the Woods?

Not by a long shot. The Circuit Court's ruling simply means that Litvak will have the joy of sitting through another trial against him for the Securities Fraud charges -- but this time including the expert testimony of Ram Willner that trader's ramblings like Litvak's are "generally biased" and "often misleading." This ironic legal strategy won't be the strangest thing we've seen so far out of this case -- watching your own witness calling you unprofessional.

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