Bond Trader Acquitted Of All But One Securities Fraud Charges In Retrial
On January 27, 2017, a federal jury in New Haven, Connecticut found former bond trader Jesse Litvak not guilty on all but one of ten charged securities fraud counts. United States v. Litvak, D. Conn., 3:13-Cr-19, Jury Verdict (Jan. 27, 2017). This case was a re-trial, after a jury’s earlier verdict—finding Litvak guilty of all counts—was reversed and vacated. United States v. Litvak, 30 F. Supp. 3d 143 (D. Conn. 2014), rev’d in part, vacated in part, 808 F.3d 160 (2d Cir. 2015). As discussed below, the verdict was a sound defeat for the Government’s particular theory of fraud in the retail bond markets, which the defense vigorously challenged at both trials.
The criminal charges essentially boiled down to allegations that Litvak made false statements to trading counterparties during bond purchase and sale negotiations. The Government argued that Litvak committed fraud by misrepresenting to trading counterparties: (1) the prices at which Litvak’s firm acquired the bonds it was selling; (2) the prices at which his firm would resell the bonds it was purchasing; and (3) that his firm was acting as an intermediary in the transactions, when—in reality—it was selling the bonds from inventory. The falsity of these statements—and the allegation that Litvak made them—was not seriously disputed during Litvak’s first or second trial. Instead, the defense focused on whether those statements were material.
At the first trial and on appeal, the courts rejected Litvak’s defense that these statements were immaterial as a matter of law. However, the Second Circuit found that the trial court erred in the first trial by refusing to permit the defense to offer expert testimony regarding the bond-trading market, where purchases are largely driven by complex pricing models, rather than negotiations among bond salesmen. This evidence bore on the materiality defense, and the Second Circuit therefore vacated Litvak’s conviction. See United States v. Litvak, 808 F.3d 160 (2d Cir. 2015).
At the re-trial, Litvak again argued that his allegedly false statements to bond investors were mere puffery and not material, similar to comments that used car salesmen make to customers. This time around, Litvak was permitted to offer additional evidence regarding the bond market generally, and was acquitted of all but one count. The jury’s verdict is a sound rejection of the Government’s blanket theory that all false statements regarding underlying purchase prices or future re-sales in the bond market are “per se” fraudulent. Rather, the jury certainly considered the nature of the bond market as a whole in assessing whether Litvak’s alleged false statements amounted to ones that were both material and fraudulent. While the Second Circuit rejected the argument that statements in this context are immaterial as a matter of law, the jury’s verdict demonstrates the practical difficulties prosecutors will face in convincing a jury that similar statements are both criminal and fraudulent. To date, the Government has continued to aggressively pursue this theory—since Litvak’s indictment, for example, at least six other traders have faced criminal charges over similar types of allegedly deceptive sales practices. The Litvak verdict will undoubtedly serve as a deterrent to the Government in bringing criminal cases for such conduct given the changed landscape regarding the proof the defense can offer and the jury’s assessment of what the Government perceived to be an egregious set of facts. It remains to be seen whether the Government will now seek to pursue civil enforcement actions when confronted with future cases, which affords the Government greater leeway with a lower burden of proof.
Of course, despite this victory, Litvak will be sentenced on the sole count of conviction. However, the defense will have strong arguments that Litvak should be subject to a lower Guideline range (tied just to the sole count of conviction) than when he was originally sentenced in 2015, and that he should receive a significantly lower sentence than the two years of imprisonment that the court previously imposed. In addition, Litvak will no doubt appeal this conviction, including on the materiality grounds that the Second Circuit considered before.