(New throughout, adds details from hearing, background, comments)
By Jonathan Stempel
NEW HAVEN, Conn., July 23 (Reuters) - A former Jefferies Group Inc managing director convicted of defrauding investors who traded mortgage bonds through a government program established after the 2008 financial crisis was sentenced on Wednesday to two years in prison.
Jesse Litvak, 39, had been convicted on March 7 on all 15 counts, including 10 counts of securities fraud and one count of fraud under the federal bailout known as the Troubled Asset Relief Program (TARP).
Litvak was the first person charged under a 2009 law banning major fraud against the United States through TARP.
He was sentenced by Chief Judge Janet Hall of the U.S. District Court in New Haven, Connecticut, who presided over the jury trial. Hall also fined Litvak $1.75 million.
Defense lawyers had contended that their client, a married father of two, had been unfairly singled out for behavior that was common on Wall Street.
"I do not view you as singled out," the judge told Litvak. "You lied. Maybe that's what people do every day on Wall Street, but that still doesn't make it legal."
The prison term was longer than the maximum 14 months requested by Litvak. It was also shorter than the nine years sought by prosecutors, who also wanted a $5 million fine.
Hall found the government request unduly harsh.
The judge told Litvak she believed he would not commit another crime and, citing many supportive letters she received from the defendant's family, friends and colleagues, said: "You sound like a person that's worth knowing."
Litvak showed little emotion and did not speak in his defense. He is expected to surrender by Nov. 5. His lawyers declined to comment afterward.
The U.S. Department of Justice has been criticized by investors, politicians and others for not prosecuting more people on Wall Street over misconduct related to the financial crisis.
Federal prosecutor Jonathan Francis insisted at the hearing that Litvak was not singled out for prosecution.
"Someone has to go first," he said.
Prosecutors accused Litvak of lying to customers such as AllianceBernstein Holding LP from 2009 to 2011 by inflating prices of mortgage-backed securities, concealing what Jefferies paid for the bonds, and inventing sellers.
They said Litvak's activity generated more than $2 million for Jefferies and boosted his pay by hundreds of thousands of dollars.
Among the investors cheated were participants in the Public-Private Investment Program, a TARP initiative designed to restart the mortgage debt market, prosecutors said.
Litvak countered that his customers were professionals who could tell whether prices were fair, and that his activities were commonplace within the industry.
"The culture at Jefferies and on Wall Street really did affect Mr. Litvak's judgment" about what was acceptable, his lawyer Patrick Smith said.
Smith said his client's customers thought they were getting good prices, making his case different from frauds such as Bernard Madoff's, where victims suffered punishing losses.
After the hearing, U.S. Attorney Deirdre Daly said she has an "active an ongoing investigation" into financial misconduct and that Litvak's "significant" punishment should deter others.
"It tells anyone who works on Wall Street that if they lie to their customers or cheat their investors, that they risk going to jail," Daly said in an interview.
Jefferies, a unit of Leucadia National Corp, agreed on March 12 to enter a nonprosecution agreement and pay $25 million to settle criminal and civil probes into its alleged failure to supervise Litvak and other traders.