United States v. Litvak
808 F.3d 160 (2015)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A broker-dealer's misrepresentations about transaction-related facts, such as the acquisition cost of a security, can be material under securities fraud laws if there is a substantial likelihood a reasonable investor would find the information important in making an investment decision. The determination of materiality in such cases is a question for the jury, not a matter of law.
Facts:
- Jesse C. Litvak was a bond trader at Jefferies & Company, where he bought and sold residential mortgage-backed securities (RMBS).
- Between 2009 and 2011, Litvak made three types of misrepresentations to counterparties to increase Jefferies' profits on RMBS trades.
- First, Litvak misrepresented to purchasing counterparties that Jefferies had acquired RMBS at a higher price than it actually paid, inducing the buyer to pay more.
- Second, Litvak misrepresented to selling counterparties the price at which Jefferies had arranged to resell their RMBS, causing the seller to accept a lower price.
- Third, Litvak falsely claimed to be acting as an intermediary for a third-party seller when, in fact, Jefferies already owned the RMBS in its inventory, creating a false sense of urgency or justification for his pricing.
- Some of the counterparties involved were Public-Private Investment Funds (PPIFs), which were financial vehicles established in partnership with the U.S. Department of the Treasury.
- Litvak’s conduct was discovered after a colleague inadvertently sent an internal spreadsheet to a counterparty, Michael Canter of AllianceBernstein, who then reported the discrepancies to the Treasury.
Procedural Posture:
- The U.S. government filed an indictment in the U.S. District Court for the District of Connecticut charging Jesse Litvak with securities fraud, fraud against the United States, and making false statements.
- Following a fourteen-day trial, a jury found Litvak guilty on ten counts of securities fraud, one count of fraud against the United States, and four counts of making false statements.
- Litvak filed a post-trial motion for a judgment of acquittal or, in the alternative, a new trial.
- The District Court denied Litvak's motion and sentenced him to 24 months' imprisonment and a $1.75 million fine.
- Litvak, as appellant, appealed his convictions to the U.S. Court of Appeals for the Second Circuit; the United States was the appellee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a bond trader's misrepresentation about transactional details—such as the broker-dealer's acquisition cost, its resale price, or its role as principal versus agent—constitute a material misstatement for the purposes of securities fraud?
Opinions:
Majority - Straub, Circuit Judge
Yes, a bond trader's misrepresentation about transactional details can be a material misstatement for the purposes of securities fraud. On the record, a rational jury could conclude that Litvak's misrepresentations were material. The court reasoned that materiality under Section 10(b) exists where there is a 'substantial likelihood that a reasonable investor would find the... misrepresentation important in making an investment decision.' Several representatives of Litvak's counterparties testified that his misrepresentations were 'important' to them and led to financial harm. Unlike cases involving small, disclosed fees (Feinman v. Dean Witter Reynolds), Litvak's misrepresentations involved substantial sums embedded within the price in an opaque market, preventing counterparties from discovering the true cost of the transaction. Finding these statements immaterial as a matter of law would be an impermissibly restrictive construction of § 10(b). However, the court also found that the district court committed a harmful error by excluding expert testimony regarding how sophisticated investors value RMBS and the customs of the industry. This error deprived Litvak of a fair opportunity to present his defense that a reasonable investor would not have found his statements material. Accordingly, the securities fraud convictions were vacated and the case remanded for a new trial. The court also reversed Litvak's convictions for fraud against the United States, finding the misstatements were not material to any decision the Treasury was authorized to make.
Analysis:
This decision significantly clarifies that the scope of materiality in securities fraud extends beyond misstatements about a security's intrinsic value to include fraudulent statements made during price negotiations. It establishes that lies about a broker's profit, acquisition cost, or role in a transaction can form the basis of a criminal conviction, especially in opaque markets where such information is not otherwise available. The ruling rejects a bright-line rule that such 'price talk' is always immaterial, instead affirming that materiality is a fact-intensive question for the jury. This precedent strengthens protections for even sophisticated investors against deceptive negotiation tactics and confirms that the context of the transaction is critical to the materiality analysis.
Unlock the full brief for United States v. Litvak