Criminal defendants rarely suffer being tried twice for the same crime, thanks to the Double Jeopardy Clause of the Fifth Amendment to the U.S. Constitution. But former Jefferies RMBS bond trader Jesse Litvak is thankful to have received a second chance to convince a jury he is innocent of federal securities fraud charges, in a new trial that just concluded this past Friday before Chief Judge Janet Hall of the U.S. District Court for the District of Connecticut in New Haven.
Litvak is accused of profiting as much as $2.5 million by lying about prices to institutional money managers who purchased or sold RMBS bonds through Jefferies, in order to induce them to increase their bids or lower their offers beyond levels where counter parties had already agreed to trade. He was first convicted on 10 counts of securities fraud in 2014 after a two-week trial. However, the Second Circuit Court of Appeals overturned his conviction in late 2015, ruling that Judge Hall, who also presided over the 2014 trial, erroneously excluded expert testimony Litvak’s attorneys had wanted to present in his defense.
Such expert testimony was to support Litvak’s contention that the lies he told his customers about what prices he had paid for bonds—or at what prices other counterparties he was in touch with would buy or sell bonds—were not material to his customers’ decisions to trade with him. Materiality is a key element of the securities fraud charges against Litvak. Explained in legal terms in order to determine whether securities fraud occurred under federal law, a lie is material if there is a substantial likelihood that a reasonable investor would view it as significantly altering the mix of information available in making an investment decision. In other words, would the lie meaningfully impact a reasonable investor’s decision whether to buy or sell at a particular price?
Litvak’s defense attorneys made no mistake last Thursday in making sure that, this time around, the long-awaited expert testimony they were precluded from offering at the first trial would be the highlight of Litvak’s defense. In fact, it was the only light. After seven days of listening to Department of Justice prosecutors walk the jury through all 10 counts of securities fraud, as they had done back in 2014, Litvak’s defense case took all of about three hours to complete, and consisted entirely of expert witness Phillip “Buck” Burnaman II, a Harvard-educated, 30-year Wall Street vet with vast experience trading and managing RMBS, as well as CLO’s and distressed loans before RMBS had even been invented. (See The Big Short to better understand RMBS and be entertained at the same time.)
Burnaman relentlessly hammered home a single point of emphasis: that RMBS investors use sophisticated financial models, relying on both fundamental and quantitative data and projections to determine how to price buying and selling bonds. In Burnaman’s expert opinion, such analysis takes no account of the price a broker-dealer paid for bonds prior to reselling them to customers, nor what it tells its customers it paid. Only the total price paid by the investor to purchase the bonds matters, as that is what determines the investor’s cost basis in the bonds, and therefore how the investment return is measured. In Burnaman’s view, “If you buy or sell a bond it means you liked the price; it was acceptable to you.”
As far how much faith to put in what a bond dealer might tell him about the price the dealer had just paid for the bond Burnaman is about to buy? Zilch, according to Burnaman. “Pricing information that cannot be verified is hard to put much faith in,” Burnaman testified. “I wouldn’t rely on what a dealer says he paid for a bond if I can’t verify it—if a dealer tells me how much he paid for a bond, all I take from it is that he wants me to pay more than that for it.”
It would have been very interesting to hear Burnaman answer the question of whether in fact he would, or ever did, adjust his bid in reaction to what a dealer told him about the price the dealer paid for bonds Burnaman was looking to buy. But it was not surprising, and probably wise that Litvak’s attorneys steered clear of that line of questioning.
More surprising is that prosecutors made no attempt to prod Burnaman to admit, or at least make it difficult for him to deny, that he ever reacted to what a dealer told him about prices—which might be hard to believe coming from someone like Burnaman, who testified that he had conducted or supervised thousands of RMBS trades throughout his career. Instead, the cross-examination of Burnaman appeared more preoccupied on the enviable hourly rate Burnaman charges for his expert services ($1,000) and how many hours he had spent on the case thus far (about 45-50) while somehow only reading a single Bloomberg chat between Litvak and one of his customers.
Once Burnaman stepped down from the witness stand on Thursday afternoon following three hours of perspiration-less testimony, more surprising still may have been the government’s “nothing further, your honor” response to Judge Hall’s invitation to offer any rebuttal to the defense expert. What? Were prosecutors truly content to allow the defense to have the last evidentiary word before closing arguments? Evidently so.
With five former customers of Litvak having already testified for the government that it indeed mattered what Litvak had told them about prices, and that such information was indeed important to them, prosecutors apparently felt no need to engage in a “battle of experts” with Litvak. They chose to allow Litvak’s “victims,” as prosecutors described the sophisticated bond fund managers whom they called to testify, to speak for themselves about the relevance of pricing information they received from Litvak. One such “victim,” Joel Wollman, a portfolio manager with QVT Financial, when asked under oath if it was okay to lie when conducting an arms-length trade said “It depends on the situation.”
Closing arguments this past Friday offered one of the more entertaining moments of the 10-day trial. Litvak’s lead trial attorney, Dane Butswinkas of Williams & Connolly, physically cleared space on a courtroom table in front of the jury and challenged the government to fill it with a single document showing that any of Litvak’s customers ever included anything in their analytical models about what Litvak—or any other dealer for that matter—ever told them about prices, or any document showing that a price Litvak offered a bond to them at wasn’t a good price.
Needless to say (after all, who of sound mind would ever claim a federal employee can’t push paper?) prosecutors accepted the challenge. They proceeded to use the 30 minutes they had reserved to rebut Butswinkas’s closing argument to fill up that space on the courtroom table with trading records and Bloomberg chats demonstrating that Litvak’s customers in each instance had indeed reacted to Litvak’s lies about prices by agreeing to trade at those prices, plus a fictitious tack-on commission. (Fictitious because Litvak had already acquired the bonds in Jefferies’ inventory and was trading with his customers as principal, and not as their agent.)
After listening to Judge Hall give more than an hour of instructions, the jury had barely begun deliberating late Friday afternoon when court recessed for the long holiday weekend. When jury deliberations resume Tuesday morning, Litvak, whose family and friends filled the benches behind him during closing arguments Friday, will no doubt be hoping that like with many investments, past performance is no indication of future results when it comes to securities fraud verdicts as well.
Andrew D. Beresin is a practicing securities attorney, former hedge fund trader, and a senior consultant with UnderwoodFX. He represents Wall Street firms and individuals in compliance, enforcement defense, and regulatory advisory matters, and provides expert services on exchange-listed trading. Beresin is a former federal district court judicial clerk and a graduate of Harvard Law School.