United States v. Litvak: Second Circuit Holds That Bond Trader’s Misstatements About Pricing Are “Material” Under Section 10(b), Permits Defendant to Offer Extensive Expert Testimony

Sullivan & Cromwell LLP - December 14, 2015

On December 8, 2015, the Second Circuit issued its decision in United States v. Litvak, which reversed the defendant’s conviction and remanded the case for a new trial.  Notwithstanding the reversal, the Court reaffirmed the “longstanding principle” that Section 10(b) of the Securities Exchange Act of 1934 is to be construed “flexibly,” and held that misstatements that might otherwise be considered “seller’s talk,” when viewed through the lens of the federal securities laws, may be material and can result in criminal liability.

Jesse C. Litvak was a securities trader at Jefferies & Company.  The government charged that Litvak made misstatements during negotiations with counterparty-funds that were owned in part by the U.S. Department of the Treasury—represented by professional investment managers—for the purchase or sale of residential mortgage-backed securities (“RMBS”).  At trial, the government offered evidence that Litvak (1) told sellers of certain RMBS that Jefferies had agreed to resell those RMBS for less than it actually had, arguably reducing the price Jefferies paid; (2) told purchasers of certain RMBS that Jefferies had paid more for those RMBS than it actually did, arguably increasing the sale price Jefferies received; and (3) told purchasers of certain RMBS that he was a mere middleman between the purchaser and an unnamed third-party seller, though no such third-party seller actually existed because Jefferies was the true owner of the RMBS.  Litvak did not misrepresent the quality or nature (e.g., structure or risk profile) of the RMBS.
After a trial in the United States District Court for the District of Connecticut, a jury convicted Litvak of fraud against the United States, making false statements, and committing securities fraud in violation of Section 10(b).  Litvak was sentenced principally to 24 months’ imprisonment.