A securities fraud trial with major implications on the national white-collar crime scene is set to take place in New Haven federal court next month.

The defendant, Jesse C. Litvak, has been accused of deceiving clients in order to maximize his profits as a bond trader for Jefferies & Company, Inc., an investment firm headquartered in New York City. Court documents filed on Jan. 25, 2013 list the charges against Litvak as securities fraud by deceiving buyers, major fraud against the United States and false statements to the government. Litvak’s actions allegedly resulted in his clients paying more than $2 million in excess, much of which he pocketed himself. The trial will take place at the United States District Court branch at 141 Church St., beginning Feb. 18 and a guilty ruling could set a new precedent for the prosecution in similar financial fraud cases.

“On numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, customers about the price at which his firm had bought the [mortgage-backed securities] and the amount of his firm’s compensation for arranging the trades,” according to an official complaint filed by the Securities and Exchange Commission. “Litvak’s misconduct misled customers about the market price for the MBS, and thus about the transaction they were agreeing to.”

The complaint profiles alleged deals made between May 2009 and August 2011 that reveal how Litvak was involved in inflating prices and fabricating trade partners. Industry standards allow traders to withhold pricing inforation from their customers, but require traders to be truthful when revealing prices and markups. Prosecutors accuse Litvak of lying in order to generate a larger commission for himself.

For example, in one exchange, Litvak allegedly knew that Jefferies had acquired $3.27 million of one mortgage-backed security at a certain price while pushing the same bond on asset management company AllianceBernstein under the guise that it was purchased at a higher price.

“Small guy just gave me an order on the HVMLT 07-7 2A1A [bond],” Litvak said, according to the filing. “He offered bonds at 67. Let me know if you guys want to show a level.”

As a result of this transaction, Litvak brought in at least $30,000 in illegitimate profit for Jefferies, the report states.

Michael Chase, Litvak’s lawyer, declined to comment.

However, Litvak has fought the charges for the previous year, claiming that his sales tactics were sincere and that his valuation practices were legitimate. Litvak also maintains that his clients were too financially savvy to be fooled by the simple fraud.

Yale Law School Professor Jonathan Macey, who specializes in corporate and securities law, explained that the trial boils down to the following: There are certain sales tactics that are legal, such as using hyperbole to describe products, but salesmen cannot present a factually false idea.

“The other complicated element of the trial is that the underlying product he was trying to sell wasn’t dishwashers or cars — it was securities,” Macey said.

Litvak’s trial is garnering national press coverage because these securities were at the heart of the financial crisis, Macey said. He believes that the government is trying to use the case to show their commitment to punishing those who caused the financial crisis.

According to Macey, the government argues that Litvak can be singled out from other financial advisers because he committed a crime, but the defensive claims this happens every day in interactions between clients and financial advisers working on commission basis.

If the prosecutors succeed, the case could contribute to the establishment of a common law that better defines punishment for these activities, Macey said.

Jury selection for the trial will be completed by Feb. 3.

J.R. REED
MAREK RAMILO