UPDATE 1-U.S. says ex-Jefferies banker lied, as TARP fraud trial starts

Tue Feb 18, 2014 5:53pm EST

By Richard Weizel

NEW HAVEN, Conn., Feb. 18 (Reuters) - A former Jefferies Group Inc investment banker "cheated, misled and defrauded" clients to boost profit in a $2 million scheme that took advantage of a federal program created in response to the 2008 financial crisis, federal prosecutors told jurors on Tuesday at the start of his criminal fraud trial.

Prosecutors have accused the defendant Jesse Litvak of cheating customers on residential mortgage-backed securities trades, hoping to boost Jefferies' revenue and his own pay.

The case is crucial for the government. It is the first brought under a 2009 law banning major fraud against the United States through the $700 billion federal bailout known as the Troubled Asset Relief Program (TARP).

"You are going to see evidence that Mr. Litvak knew exactly what he was doing, and that he was confident his clients would not find out," Assistant U.S. Attorney Eric Glover told jurors in the federal court in New Haven, Connecticut, in his opening statement before a packed courtroom.

Litvak had worked as a registered broker-dealer and managing director at Jefferies from 2008 until December 2011, when he was fired for alleged transgressions.

A lawyer for Litvak, Patrick Smith, conceded that his client did not always tell the truth when advising investors, but simply did what he was taught by supervisors, and that the government will be unable to prove a crime was committed.

"Jesse was only doing what a trader is supposed to do," Smith said in his opening statement. "The government is trying to say Jesse lied and that makes him guilty of fraud. The fact is that no matter how many times you tell a lie, it doesn't make you guilty of cheating people and committing fraud."

Litvak has pleaded not guilty to 10 counts of securities fraud, one count of TARP fraud and four counts of making false statements. Another securities fraud count was dismissed on Tuesday, court records show. The defendant could face up to 20 years in prison on each fraud count.

"SMART MONEY MANAGERS"

Prosecutors said the United States was a victim because some of Litvak's bond buyers had taken part in TARP's Public Private Investment Program, which was intended to help rebuild a market for troubled mortgage debt.

Glover said Litvak took advantage of customers from 2009 to 2011 by lying about the prices he paid for bonds and inventing an imaginary seller of bonds that Jefferies already held.

Prosecutors have said Litvak conducted his scheme in part to offset trading losses and to boost his compensation. They said his customers included funds at AllianceBernstein Holding LP , BlackRock Inc, Soros Fund Management LLC, Daniel Loeb's Third Point LLC and Wellington Management Co.

"Mr. Litvak could have done things in a different way by telling clients to take the price or leave it," Glover said. "He chose to mislead clients about prices in an effort to make extra commissions and defraud them and the government."

Smith countered that Litvak's clients and supervisors were "smart money managers" who "didn't care about his tactics. His clients just wanted to make a profit, and he helped his clients do that. His supervisors knew what he was doing, and encouraged it. It was pure salesmanship."

During the afternoon, prosecutors questioned their first three witnesses, including David Miller, a former chief inventory officer for TARP.

Testimony is expected to resume on Wednesday, and Chief Judge Janet Hall of the Connecticut federal court told jurors that she expects the trial to last about four weeks.

Jefferies recently agreed to pay $25 million to settle U.S. criminal and civil probes into mortgage-backed securities purchases and sales after the financial crisis.

That sum would include fines of $10 million payable to the U.S. attorney in Connecticut and $4 million payable to the U.S. Securities and Exchange Commission, and $11 million to others harmed by suspect trades.

Jefferies is now part of Leucadia National Corp. Neither company was charged.

The cases are U.S. v. Litvak, U.S. District Court, District of Connecticut, No. 13-cr-00019; and SEC v. Litvak in the same court, No. 13-00132.

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