In a ruling that will shape how the U.S. Justice Department and Securities and Exchange Commission pursue several similar cases already in the pipeline, a federal appeals court threw out Jesse Litvak’s March 2014 conviction for defrauding the U.S. Troubled Asset Relief Program and making false statements to the government. Prosecutors will retry charges of lying to buyers and sellers of mortgage-backed securities.
Tuesday’s decision forces the U.S. to bolster its case that traders who lie to customers are committing fraud. In it, the appeals court faulted the judge for excluding some defense evidence, saying the accused must be allowed to show that his actions were in keeping with how Wall Street does business.
That puts the industry in the uncomfortable spot: To beat government accusations that bond traders are cheating investors, defense attorneys may have little choice but to tell juries the market’s sophisticated participants understand that trading securities is a lot like stepping onto a used-car lot.
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A central issue in the Litvak case is whether it’s important for the buyer of a bond to know how much a trader paid for it. Prosecutors argued that Litvak’s lies about how much he paid constituted fraud. Litvak’s team compared their client to used-car salesman who isn’t expected to be honest about what he paid for a car: If a sophisticated bond-buyer agrees the price is fair, they argued, it doesn’t matter what the dealer originally paid.
The government welcomed the ruling, in which the judges said “a rational jury could have found that Litvak’s misrepresentations were material” after hearing all the evidence, including defense testimony that was excluded.
“We are gratified that the panel unanimously upheld the government’s securities fraud theory and found that the jury was justified in concluding that Mr. Litvak’s misstatements were material to investors,” Connecticut U.S. Attorney Deirdre Daly said in a statement. “Today’s opinion affirms the government’s ongoing efforts to investigate and prosecute fraud in the fixed- income markets.”
The defense also hailed the ruling.
“We’re very pleased with the decision today in Jesse’s case,” Kannon Shanmugam, Litvak’s attorney, said in an e-mailed statement.
The reversal threatens at least one criminal case — that of Matthew Katke, a former Royal Bank of Scotland Group Plc trader of collateralized loan obligations who pleaded guilty in March to fraud and agreed to cooperate with prosecutors. Katke’s agreement allows him to withdraw his plea if a “final decision” is reached that Litvak didn’t violate the laws he was charged under. The decision to retry Litvak keeps Katke in limbo for now.
Katke’s plea followed suspensions at Wall Street banks as regulators increasingly scrutinize asset-backed debt trades. Royal Bank of Scotland, JPMorgan Chase & Co., Morgan Stanley and Barclays Plc have put traders on leave amid the inquiries.