February 18, 2014 / 9:40 PM / in 4 years

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

NEW HAVEN, Conn., Feb. 18 (Reuters) - Former Wall Street investment banker Jesse Litvak “cheated, misled and defrauded” clients and lied to the government in a $2 million trading scheme after the 2008 financial crisis, federal prosecutors told jurors on Tuesday at the start of his criminal fraud trial.

Prosecutors have accused the former Jefferies Group Inc managing director 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 argument.

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.

An attorney 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 told jurors. “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 11 counts of securities fraud, one count of TARP fraud, and four counts of making false statements. If convicted, he faces up to 20 years in prison on each count.


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.”

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.

Prosecutors planned to call their first witnesses on Tuesday afternoon, including David Miller, chief inventory officer for TARP.

Chief Judge Janet Hall of the Connecticut federal court told jurors that she expects the trial to last about four weeks.

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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