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Jefferies Executive Tells Jury Lying to Clients Improper

businessweek.com | February 27, 2014

By John Dillon and Chris Dolmetsch

A colleague of former Jefferies & Co. bond trader Jesse Litvak, who is on trial in Connecticut for fraud in the trading of mortgage-backed securities, testified that it’s against the firm’s policy to lie to clients.

Johan Eveland, co-head of fixed income at Jefferies, told jurors yesterday in New Haven under questioning from defense attorneys that lying is “just not a proper way of conducting business with a client.” Some of Litvak’s former customers testified this week that lies and misrepresentations are a common part of the give-and-take of bond trading.

Litvak, 39, of Manhattan, is accused of misrepresenting how much sellers were asking for securities, or what customers would pay, while keeping the difference for Jefferies. He’s the only person charged with fraud in connection with an initiative to distribute more than $20 billion from the Troubled Asset Relief Program, which the U.S. government created during the 2008 credit crisis to help bail out banks.

Litvak’s lawyers began their defense yesterday by calling Eveland after the government rested its case following about six days of testimony from a dozen witnesses.

When asked by Patrick Smith, an attorney with DLA Piper LLP representing Litvak, if lying is a fireable offense, Eveland said it depended on the circumstances.

“It depends on how often it happens and what the lie was,” said Eveland, who is scheduled to return to the stand today. “It’s a case-by-case basis and it’s hard to have a blanket statement.”

Smith argued during opening statements last week that Litvak’s customers used computer models to determine the best prices for bonds and didn’t care about his sales tactics, which the attorney said were part of Jefferies’ culture and were practiced by supervisors and other traders.

A jury was selected Feb. 3 before U.S. District Judge Janet Hall. The trial started with opening statements and the first government witness two weeks later. Smith has said his defense is scheduled to last three days. He hasn’t said whether Litvak will take the stand.

Litvak was indicted in January 2013 on charges of securities fraud, making false statements and fraud connected to TARP. He has pleaded not guilty. He faces as long as 20 years in prison if convicted of securities fraud.

Pools of home loans securitized into bonds were a central part of the housing bubble that burst, helping send the U.S. into the biggest recession since the 1930s. The largest global banks lost billions of dollars on mortgage-backed debt as U.S. home prices plunged and the market for such assets dried up.

While the securities rebounded after the crisis, markets remained illiquid with wide spreads between bids from buyers and sellers. Congress authorized the $700 billion rescue in October 2008. TARP used bailout funds to spur investment in mortgage-backed securities issued before 2009 that remained on the books of financial institutions.

Litvak’s arrest in January 2013 predated a wider probe into mortgage-backed securities at banks including JPMorgan Chase & Co. and UBS AG. (UBSN) Those firms received U.S. requests for information about trades during the financial crisis, people familiar with the probe previously said.

A 1997 graduate of Emory University in Atlanta, Litvak joined Jefferies’ Stamford, Connecticut, office in April 2008 after more than a decade at RBS Greenwich Capital in Greenwich, according to Financial Industry Regulatory Authority records. A customer complained to Jefferies in November 2011 that it had been overcharged for some mortgage-backed securities, according to the regulator. Federal prosecutors said the firm fired Litvak the following month.

New York-based Jefferies, which was acquired by Leucadia National Corp. (LUK:US) last year, in January agreed to pay $25 million to settle U.S. probes of suspected abuses in the trading of mortgage-backed securities.

The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).


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