United States v. Litvak
889 F.3d 56
| 2d Cir. | 2018Background
- Jesse Litvak, a Jefferies bond trader, was tried twice for securities fraud for allegedly misrepresenting the price Jefferies paid for RMBS to increase Jefferies’ profit; after the first appeal (Litvak I) most counts were vacated and remanded for retrial.
- RMBS trades at issue involved institutional, sophisticated investors in an opaque, OTC market where broker-dealers transact as principals (inventory, order, and BWIC trades).
- The sole conviction on retrial (Count Four) involved a BWIC sale to Invesco where Litvak said he bid the buyer’s level (79-24) though Jefferies bought at 79-16; the alleged additional profit to Jefferies from the misstatement was about $73,000 on a ~$23.6M bond.
- At retrial the government elicited testimony from Invesco trader Brian Norris that he believed Litvak was acting as Invesco’s agent, although (1) that belief was erroneous, (2) Invesco’s compliance had informed Norris broker-dealers are principals, and (3) the district court instructed the jury that Litvak was not an agent.
- The jury acquitted on nine counts and convicted on Count Four; the Second Circuit holds misstatements could be material but that admitting evidence of Norris’s idiosyncratic, incorrect belief in an agency relationship was reversible error because materiality is judged objectively.
- Court vacated the conviction, ordered remand, and released Litvak on bond pending further proceedings.
Issues
| Issue | Plaintiff's Argument (Government) | Defendant's Argument (Litvak) | Held |
|---|---|---|---|
| Whether Litvak’s misstatements were material to a reasonable investor in the RMBS market | Misstatements about broker-dealer purchase price could alter the "total mix" and were important to counterparties' decisions | Misstatements were immaterial as a matter of law because they did not affect intrinsic bond value and only involved negotiation over price or small profit amounts | Misstatements could be material; evidence was sufficient for a jury to find materiality (objective reasonable-investor standard applies) |
| Whether testimony that a counterparty mistakenly believed Litvak was the buyer’s agent was admissible/relevant to materiality and intent | Testimony was relevant to show victims’ trust and Litvak’s intent to defraud; it reflected the counterparties’ point of view | The belief was objectively unreasonable, irrelevant to the reasonable-investor standard, and highly prejudicial | Admission was error; because the belief was indisputably wrong and central to the lone conviction, its admission was not harmless and requires vacatur and remand |
| Whether the district court’s evidentiary ruling (admitting agent-belief testimony) was harmless error | Government argued other evidence supported materiality and jury was not misled | Litvak argued the agent testimony was the distinguishing evidence for the single conviction and substantially influenced the jury | Not harmless: given acquittals on similar counts and the importance of the testimony, the error likely affected the verdict |
| Standard for materiality in RMBS context: objective or subjective? | Government relied on counterparties’ testimony about importance to their decisions | Litvak argued reliance on subjective victim testimony was insufficient absent proof relevant to reasonable investors | Court reaffirmed materiality is objective—what a reasonable investor in that market would consider important—and subjective, idiosyncratic misperceptions are irrelevant |
Key Cases Cited
- United States v. Litvak, 808 F.3d 160 (2d Cir. 2015) (prior appeal reversing and remanding certain convictions and discussing admissibility of expert testimony on RMBS markets)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality judged by whether a fact would significantly alter the total mix of information available to a reasonable investor)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) (reasonable-investor standard for materiality is objective)
- Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013) (reaffirming objective materiality standard)
- United States v. Vilar, 729 F.3d 62 (2d Cir. 2013) (elements of securities fraud including material misrepresentation and scienter)
- United States v. Rosemond, 841 F.3d 95 (2d Cir. 2016) (harmless-error standard for evidentiary mistakes in criminal trials)
- Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539 (2d Cir. 1996) (some misstatements may be "obviously unimportant" and immaterial as a matter of law)
- United States v. Coplan, 703 F.3d 46 (2d Cir. 2012) (standards for reviewing sufficiency of the evidence)