Connecticut Trader Accused of Fraud

"Simply telling a lie does not make you guilty of committing a federal crime." Those were the words of Jesse C. Litvak's attorney, Patrick J. Smith, during opening statements this week. These lies Smith was talking about are the lies that Litvak told his clients regarding the prices of bonds. At what point do lies cross the line into securities fraud?

Jesse C. Litvak, a former investment banker, was charged with defrauding investment funds after lying to clients about bond prices to increase profits. Litvak was a registered broker-dealer and managing director at Jefferies & Co. Inc. who worked on the company's trading floor in Stamford, Connecticut. He was officially charged with securities fraud, Troubled Asset Relief Program fraud, and making false statements to the federal government.

Securities fraud is a federal crime under 18 U.S.C. 1348 and is defined as the intentional execution or attempt to defraud any person in connection with any security of an issuer - or to obtain, by means of false or fraudulent pretenses, representations or promises, any money or property in connection with the purchase or sale - of a class of securities registered under Section 12 of the Securities Exchange Act of 1934 or that is required to file reports under Section 15(d) of the Securities Exchange Act of 1934.

The indictment for these charges states that Litvak engaged in a scheme to defraud customers on residential mortgage-backed securities trades by misrepresenting asking and selling prices, keeping the difference between the price paid by the buyer and the price paid to the seller for Jefferies. Those simple "lies" were not the only thing alleged in the indictment. Additionally, Litvak allegedly misrepresented to the buyer that bonds held in Jefferies' inventory were being offered for sale by a fictitious third-party seller. This misrepresentation allowed Litvak to charge the buyer an extra commission that Jefferies was not entitled to.

The complaint profiles alleged deals made between May 2009 and August 2011 that reveal Litvak was involved in inflating prices and fabricating trade partners. In sum, Litvak was telling these lies in order to generate a larger commission for himself. Litvak faces 20 years in prison on each of the 10 counts of securities fraud, 10 years imprisonment for Troubled Asset Relief Program fraud and up to 5 years in prison on each of the four counts of making false statements to the federal government.

Source: ABC News, Trial starts for Conn. trader charged with fraud, John Christofferson, 2/18/14

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