White Collar Defense & Investigations Alert December 2015
Second Circuit Reverses Conviction in Bond Market
Misrepresentation Case, but Endorses
Government Theory of Materiality
Today, the United States Court of Appeals for the Second Circuit reversed the conviction of Jesse C. Litvak, a securities
broker and trader at Jefferies & Company. Litvak had been convicted of various counts of fraud as a result of
misstatements he allegedly made to counterparties in connection with the sale of securities. This case has been the
subject of signicant attention in the securities industry and amongst practitioners in the white-collar bar, given the
government’s aggressive prosecution of misrepresentations that many believed were similar to those commonly made
in the bond market, a principal-to-principal market in which purchasers are typically sophisticated market participants
who would be unlikely to take a bond trader’s sales pitch at face value. Though the reversal may suggest a repudiation
of the government’s aggressive stance in the Litvak case, the Court’s decision actually strikes a compromise, holding
that a rational jury could conclude that Litvak’s misstatements were material to his counterparties and thereby
constitute fraud, but further holding that the District Court improperly excluded evidence supporting Litvak’s defense.
The Court ruled that Litvak can be retried on the securities-fraud counts (but not the other counts), but the retrial will
be one in which he will not be handcuffed by the now-reversed evidentiary rulings made by the District Court.
Litvak’s alleged misrepresentations
The Court’s opinion centered on a series of misrepresentations allegedly made by Litvak to counterparties in residential
mortgage-backed securities (“RMBS”) transactions in the secondary market. First, according to the government, Litvak
misrepresented to counterparties looking to purchase RMBS Jefferies’s “acquisition costs” of the relevant bonds—that
is, the price at which Jefferies originally acquired them—by claiming that the prices were higher than they actually
were. Second, Litvak misrepresented to counterparties from which Jefferies was purchasing RMBS the prices at which
Jefferies had negotiated to resell those securities to third parties (i.e., telling the counterparties that the resale price
was lower than it actually was). Third, Litvak falsely stated to purchasing counterparties that Jefferies was functioning
as an intermediary between the purchaser and an unnamed third-party seller, when in fact Jefferies owned the RMBS,
and no third-party seller existed. According to the Court, each type of misrepresentation could have led a counterparty
to believe that a transaction resulted in less prot for Jefferies than it actually received.
The Second Circuit’s ruling
False statements count: Reversed due to insufcient evidence
Judge Chester J. Straub, writing for the three-judge panel, rst concluded that the government had set forth
insufcient evidence for a rational jury to convict Litvak on the counts of fraud against the United States and of
making false statements. These counts arose out of a unique aspect of these transactions: they were conducted in
connection with a program in which the Department of the Treasury created nancial vehicles known as Public-Private
Investment Funds (“PPIFs”) to purchase RMBS. The Court reversed Litvak’s conviction on these counts because
there was insufcient evidence to conclude that his misstatements were reasonably capable of inuencing a decision
by the Department of the Treasury. Although Litvak’s misstatements may have “negatively impacted the Treasury’s
investments,” the Court concluded that the government had not shown that Litvak’s misstatements were capable of
inuencing a decision by the Treasury Department, because the PPIFs at issue had been deliberately structured in a
manner that “kept the Treasury away from making buy and sell decisions.”
