(Updates with appeal in sixth paragraph, judge’s statement in 25th paragraph and U.S. attorney in penultimate paragraph.)
July 23 (Bloomberg) -- Ex-Jefferies & Co. Managing Director Jesse Litvak, deemed an “elite” fraudster by prosecutors for being the only person convicted of fraud over a $20 billion government bailout program, was sentenced to two years in prison for lying to customers about mortgage-backed securities.
Defense lawyers successfully argued their client deserved less than the decade in prison he faced by saying his fraud was less insidious than a Ponzi scheme or “boiler room.” The judge noted that the victims were “sophisticated investors.” Litvak’s lawyers had asked for a maximum 14-month term.
Litvak, 39, was found guilty of securities fraud and making false statements, as well as fraud connected to the U.S. Treasury Department’s Troubled Asset Relief Program. His March conviction was the first tied to the Public-Private Investment Program, an initiative that used TARP funds to spur investments in mortgage-backed securities after the 2008 financial crisis.
U.S. District Judge Janet C. Hall in New Haven, Connecticut said at an earlier hearing that Litvak “exploited the opacity of the RMBS market to his victims’ detriment.” Today, she fined him $1.75 million -- less than half what prosecutors sought -- in addition to the sentence.
“You lied,” Hall told Litvak today. “Maybe that’s what people do every day on Wall Street. That doesn’t make it legal. If anyone on Wall Street thinks it’s ok to lie, if any message gets out from this trial, I hope that message gets out.”
Litvak must surrender to authorities Nov. 5. His lawyers said he will appeal his conviction.
In January, Jefferies agreed to pay $25 million to settle U.S. probes of suspected abuses in the trading of mortgage- backed securities. Other banks, including New York-based JPMorgan Chase & Co., received requests for information about mortgage-bond trading after Litvak’s arrest, people familiar with the matter have said.
Mortgage-bond traders at Morgan Stanley, Royal Bank of Scotland Group Plc and New York-based JPMorgan were placed on leave after those inquiries. Prosecutors and regulators have said they are continuing to investigate traders at New York- based Jefferies, owned by Leucadia National Corp.
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 Jefferies.
Prosecutors had asked Hall to send Litvak to 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.”
Defense lawyers sought a sentence of no more than 14 months, saying his actions didn’t affect customer investment decisions, or their returns. They cited more than 100 supportive letters from family, friends, ex-colleagues and customers. Litvak still faces a Securities and Exchange Commission lawsuit.
At today’s hearing, Litvak’s attorney, Patrick Smith, argued that his client’s case is different from many fraud cases, such as Ponzi schemes and boiler rooms, which are intended to take investor money and leave them with nothing.
“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 responded that 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.
“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,” the prosecutor 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 markets.
“He is in an elite class of fraudster,” Francis said.
The Litvak case raised questions about just how much trickery is allowed in trading as witnesses at his trial testified that his tactics were common.
The practice of bond dealers showing clients different prices for the same securities on electronic trading platforms has drawn scrutiny from the SEC, which expressed concern that smaller investors are being penalized, a person familiar with the inquiry has said.
SEC Chair Mary Jo White has said 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.
While Jefferies cooperated once the scheme was discovered, Litvak wasn’t the only employee who lied to his customers, the government said.
According to Financial Industry Regulatory Authority records, the investment firm 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 reached a pact with prosecutors the next day. Jennings hasn’t been charged with wrongdoing.
David Zornow, a lawyer for Jennings at Skadden Arps Slate Meagher & Flom LLP, declined to comment.
Litvak’s judge said today that, while there may have been similar behavior on Wall Street and at Jefferies, Litvak was the “star of this conduct.”
“You seem to have really run with it in a way that others didn’t at the company,” Hall said. “This was a market that was dead in the water. Those bonds were unmarketable. This was really government money, this was a market that existed because of government money.”
She noted however that the proceeds didn’t go directly into Litvak’s pocket, and that his victims were “sophisticated” investors.
“They’re not a 90-year-old widow who lost every penny of her investment,” Hall said.
After today’s sentencing, Connecticut U.S. Attorney Deirdre Daly said Litvak’s “brazen and repeated lies” called for a prison term and a “very significant fine.”
“One of the sad ironies here is that one of the funds that was a victim was the fund that revived the market that in 2008 was a victim of the financial crisis,” Daly said. “The government hopes that this sentence and this prosecution is a strong message to Wall Street and those on Wall Street that lie to their customers and cheat the investors.”
Daly said “this is an active and ongoing investigation.”
The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).