Second Circuit Vacates Securities Fraud Conviction For Excluding Expert Testimony

On December 8, 2015, the Second Circuit vacated the securities fraud conviction of former Jefferies & Co. trader Jesse Litvak.1 The Court also outright reversed the convictions on fraud against, and making false statements to, the government. In vacating the convictions on the securities counts, the Court held that the District Court abused its discretion in excluding two of Litvak's experts, both of whom would have testified that Litvak's misstatements were not material.

Litvak traded residential mortgage-backed securities ("RMBS") at Jefferies in the midst of the Great Recession. The indictment charged that Litvak made three types of fraudulent misstatements to counterparties: he misrepresented to purchasers Jefferies's cost to acquire the RMBS; he misrepresented to sellers the price at which Jefferies would re-sell the RMBS; and he misrepresented to purchasers that Jefferies was acting as a broker - as opposed to a principal - on the transaction.2

Some of the counterparties with which Litvak dealt were Public-Private Investment Funds, or PPIFs. PPIFs were created in the Great Recession in an effort to resuscitate the moribund RMBS market. PPIFs are capitalized, in part, by the U.S. Treasury. It was the Treasury's funding of the PPIFs that formed the basis for the charges of defrauding and making false statements to the government.

The Court reversed the convictions on these counts, finding that Litvak's misrepresentations were not material under 18 U.S.C. §§ 1001 and 1031. To be material under these statutes, a statement must be capable of influencing the decision of, in this case, the Treasury. Litvak's statements could not have influenced a decision of the Treasury, however, because the PPIFs made all of the trading decisions and the Treasury could not direct the trading.

The Court then turned to the securities fraud conviction, which is where things got interesting. Some background: Litvak's indictment caused more than a little agita among market professionals. Prior to the indictment, many assumed that, all of the players in this market being professionals rather than public customers, the back and forth that occurred over the phone was not much more than salesmen's posturing, i.e., nothing that a counterparty would or should rely on. Some believed the government had gone too far to criminalize the behavior and, after Litvak's conviction, expected the Second Circuit to hold that such statements were not material between market...