Ex-Jefferies trader convicted of fraud in U.S. bond probe

NEW HAVEN, Connecticut Fri Mar 7, 2014 6:41pm EST

Jesse Litvak, a former managing director at Jefferies Group Inc, walks to the U.S. District Court in New Haven, Connecticut, March 4, 2014. REUTERS/Michelle McLoughlin

Jesse Litvak, a former managing director at Jefferies Group Inc, walks to the U.S. District Court in New Haven, Connecticut, March 4, 2014.

Credit: Reuters/Michelle McLoughlin

NEW HAVEN, Connecticut (Reuters) - A federal jury on Friday found former Jefferies Group Inc trader Jesse Litvak guilty of defrauding clients on mortgage bond trades made after the financial crisis.

Litvak, 39, was convicted on all 15 counts he faced, including 10 of securities fraud. He faced up to 20 years in prison on each securities fraud count.

Prosecutors accused Litvak of cheating clients out of more than $2 million between 2009 and 2011 by inflating bond prices, lying about how much Jefferies paid for them and inventing sellers.

They said he wanted to boost Jefferies' profit and his own pay, using the extra revenue to offset other trading losses. The trial lasted 2-1/2 weeks.

"Today's verdict shows plainly and powerfully that Wall Street professionals are not above the law," U.S. Attorney Deirdre Daly in Connecticut said in a statement.

"The jury rightly rejected Mr. Litvak's shameful claim that he did nothing wrong because many on Wall Street engage in the same conduct."

Litvak rubbed and shook his head as the verdict by the seven-man, five-woman jury in New Haven was read. The married father of two turned to look at his parents and crying wife in Chief Judge Janet Hall's courtroom.

"We're gratified the jury returned the verdict it did," Assistant U.S. Attorney Eric Glover told reporters outside the courtroom. "Justice was served."

His lawyer, Patrick Smith, said an appeal was planned.

"Mr. Litvak is obviously very disappointed in the verdict," Smith said. "The court made several serious errors that undermined Mr. Litvak's ability to present his full defense."

LANDMARK CASE

The verdict was a victory for the government in its effort to punish financial misconduct that occurred after the financial crisis.

Most of the recent litigation against banks had focused on pre-financial crisis conduct, but Litvak's prosecution was the first under a law banning major fraud against the United States through the $700 billion federal bailout known as the Troubled Asset Relief Program (TARP).

"This landmark case is likely to embolden prosecutors to be even more aggressive," said Jordan Thomas, a partner at Labaton Sucharow and former federal prosecutor. "Defendants awaiting trial, and individuals under investigation, will have to think twice about going the distance because of the government's demonstrated skill in successfully bringing this type of case."

Litvak also was found guilty of one count of fraud connected to TARP and four counts of making false statements.

Jefferies, now part of Leucadia National Corp, disclosed in January that it agreed to pay $25 million to resolve U.S. government probes related to Litvak, whom it fired in December 2011.

Neither Jefferies nor Leucadia was accused of wrongdoing in the criminal case, which was unveiled in January 2013.

ACTIVE GOVERNMENT PROBE

The U.S. government disclosed in January that it was investigating fraud in the trading of residential mortgage-backed securities, including in transactions stemming from the bailout.

Prosecutors said the United States was victimized because some of Litvak's clients, such as the large asset manager AllianceBernstein Holding LP, participated in the Public-Private Investment Program, a TARP initiative designed to spur demand for troubled mortgage debt.

Glover said on Friday that the investigation was "continuing, ongoing and active."

Litvak's defense lawyers had argued that his clients at Jefferies were "sophisticated" investors capable of analyzing whether the bond prices they were paying were fair.

His lawyers said Litvak's activity was common in the bond industry and that Jefferies objected only when faced with the possible loss of a big client.

Smith said Litvak's appeal would focus partly on the judge's refusal to admit evidence that Jefferies had condoned similar conduct by other traders who were not punished.

Litvak did not testify in his own defense during the trial. He also faced a U.S. Securities and Exchange Commission civil lawsuit.

He remained free on bail, and his sentencing was scheduled for May 30.

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.

(Additional reporting by Jonathan Stempel in New York; Editing by Phil Berlowitz, James Dalgleish and Amanda Kwan)

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