Litvak's Conviction Reversed Again by Federal Appeals Court

(Bloomberg) -- A federal appeals court once again reversed the conviction of a former Jefferies Group LLC managing director who is serving prison time for lying to customers about the prices of mortgage-backed bonds.

It’s the second time in 2 1/2 years that the federal appeals court has tossed out the conviction of Jesse Litvak. He is currently in the midst of a two-year term in a federal prison camp in Florida. The appeals court ordered him released on bond.

Litvak's Conviction Reversed Again by Federal Appeals Court

The ruling -- and a separate decision in another case in Connecticut -- calls into question the government’s decision to pursue criminal charges against traders who deceive clients about prices during bond negotiations. As the ruling from the Manhattan-based appeals court was issued Thursday, a federal jury in Hartford, Connecticut, acquitted a former Cantor Fitzgerald LP managing, David Demos, who was also changed with lying to customers about prices to boost his pay.

Kannon Shanmugam, an attorney for Litvak, declined to immediately comment on the decision. Prosecutors declined to immediately comment on the ruling or to say whether they’d try Litvak for a third time.

Litvak was the first of more than a half-dozen traders to be charged by U.S. authorities with fraud for lying to clients. His arrest in January 2013 put traders on notice that they could face criminal prosecution for making misrepresentations to customers while negotiating trades, sending shock waves throughout Wall Street and leading to the resignations and suspensions of dozens of traders as financial firms clamped down on shady sales tactics.

Litvak was initially found guilty of 15 counts of securities fraud in March 2014 and sentenced to spend two years in prison and pay a $1.75 million fine. An appeals court in Manhattan threw out his conviction the following year, finding that the judge overseeing his trial had improperly blocked him from presenting testimony from an expert as to how such tactics are commonly used on Wall Street.

At his second trial, held in January 2017, jurors found him guilty of just one of 10 counts of securities fraud, but the judge imposed a harsher punishment, sentencing him to spend two years in prison and pay a larger fine of $2 million. Litvak reported to a federal prison camp in Pensacola, Florida, to begin serving his sentence in September.

Less than five months after Litvak’s second conviction, a former Nomura Holdings Inc. trader accused of similar conduct, Michael Gramins, was convicted of conspiracy and cleared of six fraud counts, while jurors deadlocked on two other charges. One of his colleagues was acquitted of all charges, and jurors cleared a third Nomura trader, Ross Shapiro, of eight counts, while deadlocking on one conspiracy count.

During his second appeal, Litvak again argued that allowing his conviction to stand would criminalize every day negotiations such as haggling over the price of a used car, while focusing on his contention that prosecutors didn’t prove his lies were "material" to clients, or significant enough to affect their decisions to trade.

The appeals court said the trial judge mistakenly allowed one of Litvak’s counterparties to testify that he believed Litvak was acting as his agent, saying it could lead jurors to mistakenly believe there was a relationship of trust between the two. In a bright spot for prosecutors, the court also said that lies about bond prices could be deceptive.

The case is U.S. v. Litvak, 17-1464, U.S. Court of Appeals, Second Circuit (Manhattan.)

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