Court Testimony From Litvak Case: Lying Is All In A Day’s Work

Selling mortgage-backed securities, products at the center of the 2008 market crash, involved lying and misrepresentations as part of the game, according to testimony given by former customers of Jefferies & Company in a Connecticut fraud trial.

Jesse Litvak, a former Jefferies bond trader, is the only person charged in a trial where he is accused of defrauding investors of $2 million in an effort to package and distribute more than $20 billion in assets from the Troubled Asset Relief Program (TARP), according to a report in Bloomberg.

Fraud charges center around TARP

TARP was designed to bail out the banks that had packaged the opaque mortgage products that were advertised as having among the highest bond ratings.  No high ranking official at a bank or brokerage firm has been charged in connection with this highly lucrative activity that is credited with bringing down the financial system in 2008.  In his book Bailout: How Washington Abandoned Mainstreet and bailed out Wall Street, former Special Inspector General in charge of overseeing TARP Neil Barofsky details fighting the banks and then US Treasury official Timothy Massad over accountability regarding the program.  Massad, who was recently nominated by the Obama Administration to become CFTC Chairman, was accused by Barofsky of misleading the American public in favor of bailout participants, framing the issue in court.

Court testimony describes lying as part of mortgage-backed securities sales process

In court testimony, the interaction with Litvak and Joel Wollman, a portfolio manager with QVT Financial LP, appears most interesting. When discussing how the mortgage-backed securities sales process worked, Wollman said “Volunteering information would not give me an edge, keeping information would give me an edge.”

Under cross examination, another client of Litvak’s, Vladimir Lemin of Evanston, IL-based alternative asset manager Magnetar Capital LLC, said his role as a bond buyer had to take into account potential misrepresentations from firms selling mortgage-backed securities.  When asked “You want the other guy to believe something that may not be entirely accurate?” Lemin responded to the general give and take in the purchasing process and said “It is one of the strategies.”

Litvak, who lives in Manhattan, was indicted on 10 counts of securities fraud, four counts of making false statements and one count of fraud connected to TARP, according to the report, and has also been sued by the U.S. Securities & Exchange Commission.  Litvak potentially faces 20 years in prison if convicted of the most serious count, securities fraud.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com