The Second Circuit found no proof of material misrepresentations as to some charges, and held that expert testimony was improperly excluded as to others.
On December 8, the US Court of Appeals for the Second Circuit overturned the criminal conviction of Jesse Litvak, a former bond trader at broker-dealer and investment banking firm Jefferies & Co., reversing the convictions on all counts of fraud against the United States and making false statements, and vacating the convictions and remanding for a new trial on 10 counts of securities fraud. The Second Circuit held that the government had failed to prove the materiality of Litvak’s misrepresentations, and that the district court had improperly excluded expert testimony concerning materiality.
Background
In January 2013, Litvak was indicted on allegations that from 2009 to 2011, he fraudulently misrepresented the prices of certain residential mortgage-backed securities (RMBS) to, among others, counterparties at public-private investment funds (PPIFs), investment vehicles created and overseen by the Treasury Department as part of the Troubled Asset Relief Program (TARP). Specifically, the government alleged that Litvak had fraudulently misrepresented (i) the acquisition cost of certain RMBS; (ii) the resell price of certain RMBS; and (iii) that Jefferies was an intermediary in certain RMBS transactions, brokering on behalf of an unnamed third-party seller, when in fact it owned the RMBS.
In March 2014, a jury convicted Litvak on 10 counts of securities fraud, one count of fraud against the United States, and four counts of making false statements. The District of Connecticut subsequently denied Litvak’s motion for judgment of acquittal or new trial[1] and sentenced him to 24 months’ imprisonment, three years’ supervised release, and a $1.75 million fine.
No Materiality, No Fraud
With respect to Litvak’s conviction on charges of fraud against the United States and making false statements, the Second Circuit acknowledged a fatal flaw in the government’s case concerning the materiality of Litvak’s misrepresentations. Under controlling precedent interpreting the relevant statute,[2] a misrepresentation is only material if it has “a natural tendency to influence, or be capable of influencing, the decision of the decisionmaking body to which it was addressed.”[3] The parties did not dispute that, for purposes of the charges, the Treasury Department was the “decisionmaking body.” Yet the government failed to adduce any evidence that the Treasury Department itself had made any investment decisions at all, let alone decisions that were “reasonably capable of being influenced by Litvak’s misstatements.”[4]
To the contrary, the government’s chief witness—the former Chief Investment Officer for the Treasury Department Office of Financial Stability—had testified that although Treasury supervised the PPIFs, it was the PPIF investment managers, not Treasury officials, who decided which RMBS to buy or sell, and that Treasury had “no authority to tell the investment managers [of the PPIFs] which bonds to buy.”[5] The government’s lack of evidence “that Litvak’s misstatements were capable of influencing a decision of the Treasury”[6] therefore foreclosed the question of materiality, notwithstanding evidence that Litvak’s misrepresentations negatively impacted Treasury investments and that Treasury learned of this impact through monthly reports submitted by PPIF managers. The court then held: “because the government adduced insufficient evidence for a rational jury to conclude that Litvak’s misstatements were reasonably capable of...
