Ex-Jefferies Trader May Face Decade in Prison for Bond Lies

Jul 23, 2014 1:48 pm ET

(Updates with hearing in sixth paragraph.)

July 23 (Bloomberg) -- Former Jefferies & Co. managing director Jesse Litvak, the only person convicted of fraud related to a $20 billion government bail-out program, may spend almost a decade in prison for lying to his customers about mortgage-backed securities.

Litvak was found guilty by a jury in March of securities fraud and making false statements, as well as fraud connected to the U.S. Treasury Department’s Troubled Asset Relief Program. His conviction is the first in connection with the Public- Private Investment Program, an initiative that used TARP funds to spur investments in mortgage-backed securities after the 2008 financial crisis.

The case raised questions across Wall Street about just how much trickery is allowed in trading as witnesses at Litvak’s trial testified that his tactics were common.

Litvak, 39, of New York, is scheduled to be sentenced today by U.S. District Judge Janet C. Hall in New Haven, Connecticut. Prosecutors have asked Hall to send the former trader to federal prison for nine years and have him pay a $5 million fine, saying he “perpetrated a multi-year, multi-victim, multimillion-dollar securities fraud scheme.”

‘Selfless Man’

Litvak’s lawyers, meanwhile, have asked Hall to sentence their client to no more than 14 months in prison, saying he’s a “genuine, humble and selfless man” whose actions didn’t affect Jefferies customers’ investment decisions or their returns. They cited more than 100 supportive letters from family, friends, former colleagues and customers.

At the hearing, which began this morning, Litvak’s attorney, Patrick Smith, argued that his client’s case is different from many fraud cases, such as Ponzi schemes and “boiler rooms,” that are intended to take investor money and leave them with nothing in return.

“It’s very different from a scheme that’s intended to bilk somebody out of their money,” Smith said. The bonds that Litvak sold were “tremendous performers,” and Litvak’s lies didn’t have the same impact as other schemes have on their victims.

Assistant U.S. Attorney Jonathan Francis said Litvak perpetrated his fraud on at least 55 occasions over a period of almost three years, and each time lied to a victim who trusted him.

‘Elite Fraudster’

“Every single time he told a lie he had a price attached to it and he got to name a price,” Francis said. “He decided ‘This is how much I want to rip off a particular victim.’” Litvak’s conduct was predatory because he took advantage of his customers, Francis said.

“Litvak had superior information to his customers and he capitalized on that,” Francis said. He added that the impact of Litvak’s fraud goes beyond his particular case, as it has an effect on the transparency and honesty of the markets.

“He is in an elite class of fraudster,” Francis said.

Jefferies Settlement

Jefferies agreed in January to pay $25 million to settle U.S. criminal and civil probes of suspected abuses in the trading of mortgage-backed securities. Other banks including New York-based JPMorgan Chase & Co. received requests for information from U.S. officials about mortgage-bond trading after Litvak’s arrest, people briefed on the matter said in January.

Mortgage-bond traders at JPMorgan, Morgan Stanley and Royal Bank of Scotland Group Plc were placed on leave after those inquiries.

Investigation Continues

Prosecutors and regulators said after Litvak’s conviction in March that they were continuing to investigate mortgage-bond traders at Jefferies, saying that while the company cooperated once the scheme was discovered, he wasn’t the only employee who lied to his customers.

According to Financial Industry Regulatory Authority records, Jefferies faced pressure from prosecutors to dismiss one of Litvak’s supervisors, co-head of fixed income William Jennings, while they were investigating suspected trading abuses.

Jennings was “permitted to resign” on Jan. 27 after Jefferies learned that the U.S. Attorney’s Office in Connecticut wouldn’t settle with the company while he was still employed, according to Finra records. The investment bank, which is owned by Leucadia National Corp., reached its settlement the next day. Jennings hasn’t been charged with wrongdoing.

David Zornow, a lawyer for Jennings at Skadden Arps Slate Meagher & Flom LLP, previously declined to comment on Jennings and didn’t immediately respond to an e-mail after regular business hours yesterday seeking comment on Litvak’s sentencing.

The practice of bond dealers showing clients different prices for the same securities on electronic trading platforms has drawn scrutiny from the U.S. Securities and Exchange Commission, which is concerned that smaller investors are being penalized, a person with direct knowledge of the inquiry said in March.

Retail Investors

SEC Chair Mary Jo White said last month that her agency wants retail bond investors to have the same access to privately negotiated bond prices as big institutions, allowing them to make better decisions about how much to pay for the securities.

Litvak was arrested in January 2013 on charges 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 New York-based Jefferies.

Hall last month denied a request by Litvak to throw out his conviction, saying there was “ample evidence” that Litvak “exploited the opacity of the RMBS market to his victims’ detriment” and to the advantage of himself and Jefferies. Litvak still faces a separate lawsuit by the SEC.

The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).