UNITED STATES OF AMERICA, Appellee, v. JESSE C. LITVAK, Defendant-Appellant.
No. 14-2902-cr
United States Court of Appeals For the Second Circuit
DECEMBER 8, 2015
August Term, 2014; ARGUED: MAY 13, 2015
Before: STRAUB, PARKER and CARNEY, Circuit Judges.
KANNON K. SHANMUGAM, (Dane H. Butswinkas, Allison B. Jones, Masha G. Hansford, on the brief), Williams & Connolly LLP, Washington, DC, for Jesse C. Litvak.
JONATHAN N. FRANCIS (Heather Cherry, Sandra S. Glover, on the brief), Assistant United States Attorneys, for Deirdre M. Daly, United States Attorney for the District of Connecticut, New Haven, CT.
After trial in the District of Connecticut (Janet C. Hall, Chief Judge), a jury convicted Defendant-Appellant Jesse C. Litvak of various charges of securities fraud, fraud against the United States, and making false statements. On appeal, Litvak challenges these convictions on several grounds.
First, Litvak contends that, for the purposes of the fraud against the United States and making false statements counts, the evidence adduced at trial provided an insufficient basis for a rational jury to conclude that his misstatements were material to the Department of the Treasury, the pertinent government entity. We agree, and accordingly reverse the District Court‘s judgment of conviction as to those charges.
Second, Litvak argues that his misstatements were, as a matter of law, immaterial to a reasonable investor, which would require reversal of the securities fraud counts as well. However, because a rational jury could conclude that Litvak‘s misstatements were
Third, Litvak claims that, in respect of the scienter element of the securities fraud counts, the evidence was insufficient to support the verdict and that the District Court failed adequately to instruct the jury. Because Litvak is incorrect that “contemplated harm” is a requisite component of the scienter element of securities fraud, we reject this challenge.
Fourth, Litvak asserts a number of evidentiary errors at trial. We agree that the exclusion of certain proffered expert testimony exceeded the District Court‘s allowable discretion, and that such error was not harmless. Accordingly, we vacate the District Court‘s judgment of conviction as to the securities fraud charges and remand for a new trial. Because the other evidentiary rulings that Litvak challenges on appeal are likely to be at issue on remand, we
BACKGROUND
The charges in this case arise from Litvak‘s conduct as a securities broker and trader at Jefferies & Company (“Jefferies“), a global securities broker-dealer and investment banking firm.1
In January 2013, the government filed an indictment charging Litvak with eleven counts of securities fraud, see
In February and March 2014, a fourteen-day trial by jury was held on the charges described above, except for Count Seven (a securities fraud charge), which was dismissed on the government‘s motion the day before trial commenced. “Viewing the evidence, as we must, in the light most favorable to the government,” United States v. McGinn, 787 F.3d 116, 120 (2d Cir. 2015), we find that the jury could have reasonably concluded the following from the evidence adduced at trial.
As a bond trader at Jefferies during the relevant time period, Litvak bought and sold RMBS on Jefferies‘s behalf, sometimes as a middleman (holding the RMBS only briefly when facilitating a
First, he misrepresented to purchasing counterparties Jefferies‘s acquisition costs of certain RMBS. For example, in the course of the transaction at issue in Counts One, Twelve and Thirteen, Litvak falsely represented to Michael Canter, a representative of the AllianceBernstein Legacy Securities Fund (“AllianceBernstein Fund“), a PPIF, that Jefferies had purchased certain RMBS at a price of $58.00 (based on $100.00 face value), when in fact Litvak knew that Jefferies had purchased those securities at $57.50.4 Jefferies
subsequently sold the securities to the AllianceBernstein Fund at a price of $58.00. Canter testified that this difference would have “mattered” and been “important” to him.5 Id. at 381. If Jefferies and
the AllianceBernstein Fund had instead transacted at a price of $57.50, the Fund would have paid approximately $60,000 less for the securities (the total cost was approximately $12 million).
Second, Litvak misrepresented to selling counterparties the price at which Jefferies had negotiated to resell certain RMBS. In the course of the transaction at issue in Count Eight, for example, Litvak falsely stated to a representative of York Capital Management (“York“), a hedge fund that owned certain RMBS, that Litvak had arranged for Jefferies to resell those securities to a third party at a price of $61.25 (based on $100.00 face value). Litvak and York‘s representative, Kathleen Corso, agreed that Jefferies would purchase the securities from York at a price of $61.00, in order to allow Jefferies to reap a $0.25 profit when resold to the third party at $61.25. However, Litvak had actually arranged for Jefferies to resell
Third, Litvak misrepresented to purchasing counterparties that Jefferies was functioning as an intermediary between the purchasing counterparty and an unnamed third-party seller, where in fact Jefferies owned the RMBS and no third-party seller existed. In the course of the transaction at issue in Count Eleven, for example, Litvak falsely represented to a representative of Magnetar Capital (“Magnetar“), a hedge fund, that Litvak was actively negotiating with a seller of certain RMBS (i.e., acting as a middleman) when, in fact, Litvak knew that Jefferies held the securities in its inventory. Litvak‘s negotiations with Vladimir Lemin, Magnetar‘s representative, began with Lemin‘s offer to purchase the securities at a price of $50.50. Litvak then described to Lemin a fictional back-and-forth between himself and an unnamed,
had instead transacted at a price of $53.00, the agreed-upon transaction price of $53.25 less the understood $0.25 “commission” for Jefferies, Magnetar would have paid Jefferies approximately $14,000 less for the securities (the total cost was approximately $5.5 million).
At the conclusion of the trial, the jury convicted Litvak of securities fraud (Counts 1–6, 8–11), fraud against the United States (Count 12), and making false statements (Counts 13–16). Litvak moved for judgment of acquittal or, in the alternative, a new trial on several grounds, including those raised on appeal. The District Court denied Litvak‘s motion in a published opinion, see United States v. Litvak, 30 F. Supp. 3d 143 (D. Conn. 2014), and sentenced
This timely appeal followed. A prior panel of this Court granted Litvak‘s motion for release pending appeal because he “raised a substantial question of law or fact likely to result in reversal.” Order, United States v. Litvak, No. 14-2902-cr (2d Cir. Oct. 3, 2014), ECF No. 41 (alteration and internal quotation marks omitted).
DISCUSSION
Litvak challenges his convictions on several grounds, four of which we reach in this opinion. First, Litvak contends that, for purposes of the fraud against the United States and making false statements counts, the evidence adduced at trial provided an insufficient basis for a rational jury to conclude that his misstatements were material to the Department of the Treasury, the pertinent government entity. We agree, and accordingly reverse the District Court‘s judgment of conviction as to those charges.
Second, Litvak urges us to hold that his misstatements were, as a matter of law, immaterial to a reasonable investor, which would require reversal of the securities fraud counts as well. However, because a rational jury could conclude that Litvak‘s misstatements were material, the materiality inquiry—a mixed question of fact and law—was properly reserved for the jury‘s determination.
Third, Litvak claims that, in respect of the scienter element of the securities fraud counts, the evidence was insufficient to support the verdict and the District Court failed adequately to instruct the jury. Because Litvak is incorrect that “contemplated harm” is a requisite component of the scienter element of securities fraud, we reject this challenge.
Fourth, Litvak asserts a number of evidentiary errors at trial. We agree that the exclusion of certain proffered expert testimony exceeded the District Court‘s allowable discretion, and that such error was not harmless. Accordingly, we vacate the District Court‘s
I. Fraud Against the United States and Making False Statements
Litvak contends that, in respect of the fraud against the United States and making false statements counts, the evidence adduced at trial was insufficient to establish the materiality of his misstatements to the Department of the Treasury—the relevant government entity. Because we conclude that the evidence was insufficient to permit a rational jury to find that Litvak‘s misstatements were material to the Treasury, we reverse his convictions on those charges (Counts 12–16).
A. Standard of Review
“As a general matter, a defendant challenging the sufficiency of the evidence bears a heavy burden, as the standard of review is exceedingly deferential.” United States v. Brock, 789 F.3d 60, 63 (2d Cir. 2015) (internal quotation marks omitted). “Specifically, we must view the evidence in the light most favorable to the Government, crediting every inference that could have been drawn in the Government‘s favor, and deferring to the jury‘s assessment of witness credibility and its assessment of the weight of the evidence.” Id. (internal quotation marks omitted). “Although sufficiency review is de novo, we will uphold the judgments of conviction if any rational trier of fact could have found the essential elements of the crime beyond a reasonable doubt.” Id. (internal quotation marks omitted).
B. Materiality for Purposes of 18 U.S.C. §§ 1001, 1031
Litvak was convicted under
“[I]n order to secure a conviction under [
We have not previously addressed the contours of materiality for purposes of
The government relies primarily upon the testimony of David Miller, formerly chief investment officer for the Treasury‘s Office of Financial Stability,10 in its attempt to identify sufficient evidence from which a rational jury could have concluded that Litvak‘s misstatements were material to the Treasury.
As relevant to this case, Miller‘s role at the Treasury “was to oversee the investment program[] that [was] created as a result of the financial crisis,” Joint App‘x at 309, which formed and invested in the PPIFs. PPIFs were “partnership[s]” between the Treasury and private investors established to purchase “troubled assets,” including certain RMBS that had “rapidly deteriorat[ed] in value during the financial crisis.” Id. at 310; see also supra notes 2–3, 8.
The government also elicited testimony regarding Miller‘s prior duty to report fraud. While employed by the Treasury, if Miller received reports of fraud from PPIF managers, he would “refer that information” to the special inspector general that had been established to “provide essentially independent audit and oversight . . . to prevent fraud, waste and abuse of the [PPIFs].” Id. at 313, 316.
Even viewing the evidence in the light most favorable to the government, there was insufficient evidence for a rational jury to conclude that Litvak‘s misstatements were reasonably capable of influencing a decision of the Treasury. Despite adducing evidence that Litvak‘s misstatements may have negatively impacted the Treasury‘s investments, that this impact would have been reflected in aggregate monthly reports submitted by PPIF managers to the Treasury, and that the misstatements were the impetus for an investigation by the Treasury that eventually led to Litvak‘s prosecution, the government submitted no evidence that Litvak‘s misstatements were capable of influencing a decision of the Treasury. To the contrary, on cross-examination, Miller‘s testimony was unequivocal that the PPIFs were deliberately structured in a manner that “[kept] the Treasury away from making buy and sell decisions.” Id. at 319. To that end, Miller explained, the Treasury cast itself as a
In defending Litvak‘s convictions for fraud against the United States and making false statements, the government advances three grounds for affirmance, each of which we find unpersuasive. First, the government suggests that a jury could reasonably conclude that
Second, the government suggests that we may affirm because “the information the PPIFs reported to [the] Treasury was affected by Litvak‘s conduct.” Gov‘t Br. at 45–46. Viewing the evidence in the light most favorable to the government, we accept that Litvak‘s misstatements resulted in the PPIFs with which he transacted buying or selling RMBS at slightly lower or higher prices than they would have absent the misstatements. It may follow that the government‘s underlying contention—that information reported to the Treasury was “affected” by Litvak‘s misstatements—is accurate insofar as the monthly reports submitted by the PPIFs to the Treasury reflected marginally higher or lower aggregate balances in
Third, the government suggests that “[t]he fact that [the] Treasury actually referred the matter to [the special inspector general] for investigation demonstrates that [the] Treasury regarded Litvak‘s conduct as significant.”15 Id. at 45 (internal citation
Our decision in United States v. Rigas, 490 F.3d 208 (2d Cir. 2007), supports our conclusion in this case. In Rigas, we evaluated the sufficiency of the evidence in the context of a criminal prosecution for bank fraud, which implicates the same materiality standard applicable here. See supra note 9. We explained that “‘relevance’ and ‘materiality’ are not synonymous.” 490 F.3d at 234. Like the limitations placed on the Treasury‘s discretion here, see Joint App‘x at 321 (“Q. . . . [T]he general partner [i.e., the institutional manager of the fund] and the investment managers had all the authority? [Miller]. Correct.“), in Rigas, the banks’ discretion was also “limited,” 490 F.3d at 235. In that case, we found certain misstatements material where there was evidence that the banks would have decided to charge a different interest rate had the statements been accurate. See id. at 235–36. However, we found
Here, the government has established that Litvak‘s misstatements may have been relevant to the Treasury, and even contrary to its interest in maximizing the PPIFs’ returns. But the evidence also shows that the Treasury‘s discretion in the matters at issue was greatly constrained by its status as a limited partner in the PPIFs. See supra note 12 (Miller‘s testimony that the Treasury retained “no authority to tell the investment managers” which
Therefore, because the government adduced insufficient evidence for a rational jury to conclude that Litvak‘s misstatements were reasonably capable of influencing a decision of the Treasury, we reverse the District Court‘s judgment of conviction as to the fraud against the United States and making false statements charges (Counts 12–16).
II. Securities Fraud
Litvak raises three primary arguments in respect of the securities fraud counts. First, Litvak contends that the District Court erred in concluding that the evidence was sufficient to support a rational jury‘s conclusion that the misrepresentations on which his
Litvak argues that the misrepresentations he made to counterparties during negotiations for the sale of bonds are immaterial as a matter of law because they did not relate to the bonds’ value (as opposed to their price). Although the District Court did not squarely address this argument, it held that the trial evidence sufficiently supported a finding of materiality.17 See Litvak, 30 F. Supp. 3d at 149–50. We reject Litvak‘s argument because, on the trial record before us, a rational jury could have concluded that Litvak‘s misrepresentations were material.
1. Standard of Review
As explained above, see Part I.A, “a defendant challenging the sufficiency of the evidence bears a heavy burden, as the standard of
2. Governing Law
Determination of materiality under the securities laws is a mixed question of law and fact that the Supreme Court has identified as especially “well suited for jury determination.” United States v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.) (citing TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976)), cert. denied, 502 U.S. 813 (1991). A misrepresentation is material under Section 10(b) of the Securities Exchange Act and Rule 10b-5 where there is “a substantial likelihood that a reasonable investor would find the . . . misrepresentation important in making an investment decision.” United States v. Vilar, 729 F.3d 62, 89 (2d Cir. 2013), cert. denied, 134 S. Ct. 2684 (2014). Where the misstatements are “so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance,” we may find the
3. Materiality Was Properly Reserved for the Jury‘s Determination
We conclude that, on the trial record before us, a rational jury could have found that Litvak‘s misrepresentations were material. The trial record includes testimony from several representatives of Litvak‘s counterparties that his misrepresentations were “important” to them in the course of the transactions on which the securities fraud charges were predicated, see, e.g., supra notes 5–7, and that they or their employers were injured by those misrepresentations, see, e.g., supra notes 5–6. This testimony precludes a finding that no reasonable mind could find Litvak‘s statements material. See Wilson, 671 F.3d at 131.
In trying to persuade us otherwise, Litvak relies principally upon Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539 (2d Cir. 1996),
In affirming the district court‘s grant of summary judgment for defendants, we held that “no reasonable investor would have considered it important, in deciding whether or not to buy or sell stock, that a transaction fee of a few dollars might exceed the broker‘s actual handling charges.” Id. at 541; see also id. (“[R]easonable minds could not find that an individual . . . would be affected . . . by knowledge that the broker was pocketing a dollar or
Feinman is readily distinguishable from the case presented. First, the brokers in Feinman did not mislead their customers as to what portion of the total transaction cost was going toward purchasing securities versus the cost of the broker‘s involvement. There, the brokers were truthful in stating that a certain portion of the total transaction cost—a specific amount for each broker, up to $4.85 per trade—was charged on behalf of the broker, and that the rest of the transaction‘s total cost was used to purchase securities. See id. at 540. “[T]he fees were correctly stated, and the market was
Second, the amounts “pocket[ed]” by Litvak on behalf of Jefferies in the transactions at issue were substantially larger than “a dollar or two” per transaction, Feinman, 84 F.3d at 541; the difference between the profit his counterparties were led to believe Jefferies
Third, the remedy for the behavior described in Feinman—“competition among the firms in the labeling and pricing of their services,” 84 F.3d at 541—is not applicable to Litvak‘s behavior. Those he dealt with were unaware that he was taking a larger cut on behalf of Jefferies than he had represented to them. Without knowledge of Litvak‘s actions, the financial consequences of negotiations colored by false representations were virtually undiscoverable in the opaque RMBS market. See Litvak, 30 F. Supp. 3d at 149 (“As Litvak stresses, and as is undisputed by the government, unlike the stock market, the RMBS market is not transparent . . . .“). Until Litvak‘s misrepresentations were brought to light by his colleague‘s inadvertent email to a counterparty‘s
Setting aside Feinman, acceptance of Litvak‘s argument is also inconsistent with the “longstanding principle enunciated by the Supreme Court that
For these reasons, we do not find Litvak‘s misrepresentations immaterial as a matter of law, and we therefore conclude that the District Court appropriately left this issue, a mixed question of law and fact, see Bilzerian, 926 F.2d at 1298, for the jury to determine.20
B. Scienter
Litvak contends that the scienter element of
“Liability for securities fraud [] requires proof that the defendant acted with scienter, which is defined as ‘a mental state embracing intent to deceive, manipulate or defraud.‘” United States v. Newman, 773 F.3d 438, 447 (2d Cir. 2014) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976)), cert. denied, 136 S. Ct. 242 (2015).
Litvak urges us to read “intent to deceive, manipulate or defraud,” Hochfedler, 425 U.S. at 193 n.12, in the same manner in which we have interpreted “intent to defraud” in the mail and wire fraud contexts (i.e., as requiring proof of “contemplated harm“), see, e.g., United States v. Novak, 443 F.3d 150, 156 (2d Cir. 2006) (explaining that, in the context of mail and wire fraud, “[o]nly a
In United States v. Vilar, 729 F.3d 62 (2d Cir. 2013), the defendant similarly argued that the evidence was insufficient to support his conviction for securities fraud because the government failed to prove that he “intended to steal” from the victim. 729 F.3d at 92. We rejected that argument, holding that it “misse[d] the mark because the government was under no obligation to prove that [the defendant] wanted to steal [the victim‘s] money, only that he intended to defraud her in connection with his sale of the [securities].” Id. at 93.23 Vilar‘s holding is consistent with our earlier
In sum, because “intent to harm” is not a component of the scienter element of securities fraud under
C. Evidentiary Rulings
Litvak argues that the District Court erred in excluding certain portions of his experts’ proposed testimony. We largely agree. We principally conclude that the District Court exceeded its allowable discretion in excluding Ram Willner‘s testimony concerning the selection and valuation process undertaken by investment managers, and his expert opinion that a sell-side bond trader‘s statements, such as Litvak‘s, would be widely considered within the industry as “biased” and “often misleading,” and that excluding such testimony was not harmless. On this basis alone, we vacate Litvak‘s convictions for securities fraud and remand for a new trial.
In order to assist the District Court and the parties on remand, we also address Litvak‘s other claims of evidentiary error, and find some of his claims meritorious and others without merit.
“We review a district court‘s evidentiary rulings under a deferential abuse of discretion standard, and we will disturb an evidentiary ruling only where the decision to admit or exclude evidence was manifestly erroneous.” McGinn, 787 F.3d at 127 (internal quotation marks omitted). “Moreover, even if a ruling was manifestly erroneous, we will still affirm if the error was harmless.” Id. (internal quotation marks omitted).
2. Evidentiary Standard
“Evidence is relevant if: (a) it has any tendency to make a fact more or less probable than it would be without the evidence; and (b) the fact is of consequence in determining the action.”
3. Exclusion of Expert Testimony
Litvak proffered two experts to testify at trial: Ram Willner, a business school professor and former portfolio manager, and Marc Menchel, a regulatory and compliance attorney. The District Court excluded all of Willner‘s proposed testimony and most of Menchel‘s proposed testimony. Litvak argues that the District Court erred in excluding certain portions of Willner‘s and Menchel‘s testimony. Because we agree that the District Court exceeded its allowable discretion and conclude that at least one error was not harmless, we
a. Ram Willner
The first expert witness Litvak proffered was Ram Willner. According to Litvak‘s expert disclosure to the government, Willner holds advanced degrees in business administration with a focus on finance, served as a professor at leading business schools, and gained “extensive experience in portfolio management in the fixed income asset class, including extensive experience in the analysis and purchase of Residential Mortgage Backed Securities” during his employment by, at various times, Bank of America, Morgan Stanley, PIMCO, and a hedge fund. Joint App‘x at 207. The government has not suggested Willner‘s lack of qualification as a ground to affirm, and its motion to exclude Willner‘s testimony before the District Court included only a perfunctory request, in the “[a]lternative[,]” for a hearing pursuant to Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). Gov‘t Mot. to Preclude Def.‘s Experts at 9, United States v. Litvak, No. 3:13-cr-19 (D. Conn. Jan. 17, 2014), ECF No. 160. On the government‘s motion, the District Court excluded the entirety of Willner‘s testimony.25 On appeal, Litvak contends
Litvak contends that the District Court erred in barring Willner from testifying “about the process investment managers use to evaluate a security, and the irrelevance of the broker-dealer‘s
Before the District Court, Litvak proposed that Willner opine, in pertinent part, as follows:
[T]hat where a manager follows rigorous valuation procedures, as was the case here, consideration of, or reliance on, statements by sell-side salesmen or traders concerning the value of a RMBS or the price at which the broker-dealer acquired it or could acquire it, are not relevant to that fund‘s determination with respect to how much to pay for a bond. In Mr. Willner‘s opinion, such statements from sell-side sales representatives or traders are generally biased, often misleading, and unworthy of consideration in trading decisions.
Accordingly, such statements from sell-side sales representatives or traders are not material to a professional investment manager‘s decision-making.
Joint App‘x at 208 (emphasis added). Litvak also offered Willner to testify in respect of “the process of selecting and valuing RMBS for inclusion in an investment portfolio, including analytical tools and methods available to an investment manager, and the development of an investment thesis for a particular RMBS.” Id. at 207-08. The District Court excluded the entirety of Willner‘s proffered testimony.
The government defends the District Court‘s ruling on the ground that “[t]he materiality of Litvak‘s lies was for the jury to decide.” Gov‘t Br. at 60 (citing Bilzerian, 926 F.2d at 1295 (“[T]estimony encompassing an ultimate legal conclusion based upon the facts of the case is not admissible, and may not be made so simply because it is presented in terms of industry practice.“)). But that is true in respect of only the underlined portion of the excerpted proposed opinion testimony, and in any event, the District Court did
We conclude that the District Court exceeded its allowable discretion in excluding Willner‘s testimony in respect of the process by which investment managers value RMBS and the likely impact on the final purchase price of a broker‘s statements made to a counterparty during the course of negotiating a RMBS transaction. These portions of Willner‘s testimony would have been highly probative of materiality, the central issue in the case. This is particularly true because of the meaningful distinction between the complex securities at issue in this case and the common equities and
Consistent with this understanding, Willner‘s proffered testimony could have educated the jury (which was likely only familiar, if at all, with securities traded on public exchanges) about
With such testimony before it, a jury could reasonably have found that misrepresentations by a dealer as to the price paid for certain RMBS would be immaterial to a counterparty that relies not on a “market” price or the price at which prior trades took place, but instead on its own sophisticated valuation methods and computer model. The full context and circumstances in which RMBS are traded were undoubtedly relevant to the jury‘s determination of materiality.
Aside from Willner‘s testimony in respect of the nature of the RMBS market, there are few ways in which Litvak could put forth evidence to rebut the alleged victims’ testimony that Litvak‘s misstatements were important to them, or otherwise counter the government‘s argument that a reasonable investor would have found Litvak‘s statements material. The District Court‘s “relevance”
If we were to conclude otherwise, Litvak would be put in an untenable position whereby he could not introduce testimony that either (1) the specific statements at issue in the case would not be important to a reasonable investor (due to “ultimate issue” concerns) or (2) the types of statements at issue are generally not important to a reasonable investor. Litvak would be left only with the “victims” of his conduct as sources of potential testimony on this issue, an odd limitation where the jury is to evaluate materiality in an objective manner. See Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1191 (2013) (“[M]ateriality is judged according to an objective standard . . . .“).
We conclude that this error was not harmless. See United States v. Vayner, 769 F.3d 125, 133 (2d Cir. 2014) (“An erroneous evidentiary decision that has no constitutional dimension is reviewed for harmless error.“). “[U]nder harmless error review, we ask whether we can conclude with fair assurance that the errors did not substantially influence the jury.” United States v. Gupta, 747 F.3d 111, 133 (2d Cir. 2014) (internal quotation marks omitted).
Specifically, if defense evidence has been improperly excluded by the trial court, we normally consider the following factors:
(1) the importance of . . . unrebutted assertions to the government‘s case; (2) whether the excluded material was cumulative; (3) the presence or absence of evidence corroborating or contradicting the government‘s case on the factual questions at issue; (4) the extent to which the defendant was otherwise permitted to advance the defense; and (5) the overall strength of the prosecution‘s case.
Id. at 133-34 (internal quotation marks omitted).
The District Court‘s exclusion of this portion of Willner‘s testimony was not harmless, and the government does not suggest otherwise. Materiality was an issue central to Litvak‘s case and was hotly contested at trial. The government called to testify several purported victims (portfolio managers and traders), each of whom testified that Litvak‘s misstatements were important to them in the course of the trades charged in the indictment. Litvak‘s primary defense was that, despite the victims’ testimony, Litvak‘s statements were not material to a reasonable investor. See TSC Indus., 426 U.S. at 445 (“The question of materiality[] . . . is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor.” (emphasis added)).
Without Willner‘s testimony on this point, Litvak was left with little opportunity to present his non-materiality defense.30
Though our conclusion that vacatur is warranted on this ground alone relieves us of an obligation to address Litvak‘s additional claims of error in respect of the District Court‘s
In respect of materiality, Litvak also claims that the District Court erred in excluding another portion of Willner‘s proposed testimony: “that minor price variances would not have mattered to sophisticated investors[, which] also tended to show that Mr. Litvak‘s statements about his acquisition price would not have been material.” Litvak Br. at 44. We have recognized that a misstatement may not be material where it resulted in a mere “slight[] inflat[ion]” of transaction costs, Feinman, 84 F.3d at 541, and district courts in this Circuit have held repeatedly in the analogous civil context that “the sophistication of [the investor] is relevant
ii. Exclusion of Willner‘s “Fair Market Value” and “Profitability” Testimony Did Not Exceed the District Court‘s Allowable Discretion
Litvak also claims that the District Court exceeded its allowable discretion in excluding testimony concerning the (1) fair market value and (2) profitability of the trades at issue. We disagree.
First, Litvak contends that the District Court erred in excluding Willner‘s testimony “that the trades at issue were executed at a fair market value,” which Litvak views as “highly probative of the absence of materiality and fraudulent intent, because it would have demonstrated that a reasonable investor would have transacted at those prices regardless of Mr. Litvak‘s explanation of how the price was derived.” Litvak Br. at 44. Before
The District Court did not exceed its allowable discretion in excluding this portion of Willner‘s testimony. Whether the prices were “fair” was not an element of any of the crimes with which Litvak was charged and the potential confusion from such testimony might have outweighed any probative value. The principal issues at trial were whether a reasonable investor might have found the misstatements important and whether Litvak intended to deceive the purported victims. This testimony would not have addressed either; the District Court did not exceed its allowable discretion in concluding that whether the price the alleged victims paid was within a range of “fairness” was not relevant to determining if the misstatements themselves were important to a reasonable investor
Second, Litvak claims that the District Court erred in excluding Willner‘s testimony “that the bonds were profitable,” which “bore on the issue of Mr. Litvak‘s intent, even if it was not determinative.” Litvak Br. at 44. The District Court did not exceed its allowable discretion in finding this portion of Willner‘s testimony of minimal relevance, and that any probative value would likely have been outweighed by its potential for confusion. Whether a victim later made a profit or loss on the bonds it purchased from Litvak has no bearing on whether Litvak‘s misrepresentations were material or whether Litvak intended to deceive the purported victims. Thus, the District Court did not exceed its allowable discretion in excluding this portion of Willner‘s testimony.
b. Marc Menchel
The second expert witness Litvak proffered was Marc Menchel. As established at trial, Menchel is an attorney who served in various legal and compliance positions for broker-dealers and securities-industry regulators, most significantly as general counsel of the Financial Industry Regulatory Authority (“FINRA“).31 The government has not suggested Menchel‘s lack of qualification as a ground to affirm, and its motion to exclude Menchel‘s testimony before the District Court did not suggest exclusion on that ground.
Litvak sought to elicit Menchel‘s testimony on several topics at trial. On the government‘s motion, the District Court excluded the entirety of Menchel‘s testimony except in respect of the definition of certain terminology used during trial. On appeal, Litvak contends that the District Court exceeded its allowable 31
While the issue of whether Litvak was acting as agent or principal is not an element of any offense charged, Litvak posits that this proposed testimony “bore on both materiality and fraudulent intent.” Id. In support of this argument, Litvak highlights the testimony of one of the counterparties’ representatives, Joel Wollman, who, despite the government‘s subsequent concession that “what Mr. Litvak was doing was acting as a principal,” Tr. at 32, testified for the government as follows:
[Direct Examination:]
Q. In effect, did you understand—what did you understand, Mr. Litvak was acting as a principal or as an agent?
A. An agent.
Joint App‘x at 517.
[Cross-Examination:]
Q. And [Jefferies] own[s] [the bond] as principal and they hold it in their own account, right?
A. I do not believe that they are acting as principal in their relationship to me. I feel that in the transaction they are acting as agent to me even though they have to principally acquire the bond.
In light of this and other testimony elicited at trial, Litvak is correct that Menchel‘s testimony regarding the agent/principal distinction would have been relevant to materiality. In determining whether a reasonable investor would have found Litvak‘s misstatements important in the course of a transaction, a jury might construe such statements as having great import to a reasonable investor if coming from the investor‘s agent. Cf. Knudsen v. Torrington Co., 254 F.2d 283, 286 (2d Cir. 1958) (“[T]he agency
Thus, Menchel was prepared to testify that, contrary to the government‘s characterization in summation that Jefferies‘s profits on the trades at issue were “commission[s],” id. at 870, Jefferies‘s role was that of a principal (not an agent or broker) earning a profit as would any other buyer or seller.
Without the aid of Menchel‘s testimony, the jury might easily have misconstrued the nature of the transactions at issue, believing (mistakenly, according to Menchel) that Jefferies‘s profits were commission paid for Litvak‘s facilitation of the transactions, rather than ordinary profits earned in a standard buyer-seller context. The nature of Litvak‘s relationship with the alleged victims formed the context in which the jury had to consider whether the portfolio managers and traders who testified reflected the views of a reasonable investor; this portion of Menchel‘s proposed testimony would have supported Litvak‘s materiality defense and could have rebutted Wollman‘s above-quoted testimony.33
Therefore, the District Court exceeded its allowable discretion in excluding this portion of Menchel‘s testimony. Because we have 33
4. Exclusion of “Good Faith” Evidence
Litvak challenges the District Court‘s exclusion of “testimony and documents about the widespread use of similar negotiation tactics at Jefferies” which “would have shown that others at Jefferies engaged in the same conduct and that it was approved by supervisors and by Jefferies’ compliance department.” Litvak Br. at 46. The “good faith” evidence Litvak proffered at trial may be separated into two categories: (1) evidence of Litvak‘s supervisors’ knowledge or approval of Litvak‘s “price misrepresentation[s]” and “inventory misrepresentation[s]” and (2) evidence of Jefferies
The second category of evidence was the subject of a lengthy colloquy between Litvak‘s counsel and the District Court. After the District Court called the relevance of this evidence into question, Litvak‘s counsel responded as follows:
This is an ongoing alleged scheme . . . with the same supervisors in place for the entire time with repeated examples of the two types of alleged misrepresentations we have been talking about here. So, your Honor, I think that evidence that supervisors approve this conduct and participate in the conduct on a repeated
basis is a fair basis upon which to infer that when Mr. Litvak did the very same thing, that the supervisors saw and approved of as standard operating procedure, that Mr. Litvak lacked the intent to defraud. That‘s a fair inference from that evidence. It is a circumstantial basis to infer that Mr. Litvak had a belief, as we have contended, that he was not committing fraud . . . .
Id. at 644; see also id. (Litvak‘s counsel explaining that “the supervisors understood what Mr. Litvak had done not to be fraudulent because it was approved [and] because [they] were sales tactics that were widely employed. . . . That‘s the environment in which Mr. Litvak is operating. It all goes back to state of mind.“).
The District Court rejected this argument and prohibited Litvak from adducing evidence of “other people at Jefferies engaging in the same type of conduct” or “any supervisor approving others engaging in the conduct” because such evidence is “irrelevant when it does not involve [Litvak].” Id. at 645 (emphasis added); see also id. at 643 (District Court explaining that “I don‘t think it matters what the culture at Jefferies is.“).
Unfortunately, the precise basis for the District Court‘s oral ruling excluding the second category—lack of relevance under
On appeal, Litvak argues that the excluded evidence “would have been relevant to demonstrate [his] lack of fraudulent intent and good faith, because it would have tended to show that [he] was unaware that his actions were unlawful.” Litvak Br. at 46. In relevant part, the District Court instructed the jury that the government must prove as to each securities fraud count “that Mr. Litvak participated in the scheme to defraud knowingly, willfully, and with intent to defraud.” Joint App‘x at 978 (emphasis added). The District Court instructed the jury in respect of the “intent to defraud” prong as follows:
[I]f you find that Mr. Litvak acted in good faith, or held an honest belief that his actions (as charged in a given count) were proper and not in furtherance of any unlawful activity, you cannot convict him of that count. Mr. Litvak, however, has no burden to prove a defense of good faith. The burden is on the government to prove beyond a reasonable doubt Mr. Litvak‘s fraudulent intent.
Under the anti-fraud statutes, false representations or statements or omissions of material facts do not amount to a fraud unless done with fraudulent intent. However misleading or deceptive a plan may be, it is not fraudulent if it was devised or carried out in good faith.
Id. at 979; see also id. at 978 (District Court instructing the jury that, in order to establish the “willfully” prong of the second element, “[t]he government must prove . . . that [Litvak] was aware of the generally unlawful nature of his acts“).
Litvak sought to introduce evidence that, during the relevant time period, supervisors at Jefferies—including his supervisors—regularly approved of conduct identical to that with which Litvak was charged. The District Court characterized the proffered evidence as improperly “suggest[ing] that everybody did it and therefore it isn‘t illegal.” Id. at 645. But Litvak‘s counsel did not proffer the evidence for that purpose and such an argument in summation could have been properly proscribed by the District Court. As Litvak‘s counsel stated at trial, this evidence would
Because we have already determined that vacatur is warranted due to the District Court‘s erroneous exclusion of certain portions of Litvak‘s proffered expert testimony, see supra Part II.C.3.a.i, we address this claim of error solely to assist the District Court on remand, see, e.g., Chavis, 618 F.3d at 171, and we need not separately address whether this error was harmless.
CONCLUSION
We REVERSE the District Court‘s judgment of conviction as to the fraud against the United States and making false statements charges (Counts 12–16), VACATE the District Court‘s judgment of conviction as to the securities fraud charges (Counts 1–6, 8–11), and REMAND for a new trial on the securities fraud charges.
Notes
Joint App‘x at 381.Q. Would it have mattered to you at the time if you had known that Mr. Litvak actually paid 57-and-a-half?
A. Yes.
Q. Why?
A. Because we use that information of him buying at 58 to set the price that we would buy it at. If we could have bought it cheaper, that would have been better for my investors.
* * *
Q. Would it have been important for you to know at the time that Mr. Litvak was taking 16 ticks [thirty-seconds of a point], or half a point, instead of zero [as profit for Jefferies]?
A. Yes.
Q. Can you explain why?
A. Well, certainly, if I knew that he was being untruthful about it, then it would have affected us doing future business with him. But if just in terms of the numbers, if we could have gotten it—if we could have bought the
bond at a lower price, that would have been more profitable for my clients.
Joint App‘x at 576–77.Q. . . . Would it have been important for you to know that, in fact, your bonds were sold that day not at [$61.25] but at [$62.375]?
A. Yes.
Q. Could you explain to the jury why that would be important for you to know?
A. Because that means that I didn‘t get the best execution and that he sold them for a lot higher than what he had told me.
Q. If you had had that information at the time, what would you have done?
A. At the time, I would have either tried to rip up the trade or try to get compensation for the difference or it would have affected our relationship with Jefferies.
Joint App‘x at 544.Q. And if you had known at the time of this trade that in truth Jefferies owned the bond in its inventory and these negotiations that Mr. Litvak claims happened, didn‘t happen, would you have paid a commission?
A. Then the term commission wouldn‘t have applied. It would have been a very different situation.
Q. And, sir, do you pay commission on inventory trades, Mr. Lemin?
A. We do not.
Miller testified on cross-examination as follows:
Q. The Treasury had no authority to tell the investment managers which bonds to buy, correct?
A. Correct.
Q. The Treasury had no authority to tell the general partner [i.e., the institutional manager of the fund] of each of these funds how much to pay for a bond, correct?
A. Correct.
Q. All of that decision-making under this program, as [the] Treasury designed it, was sent over to the investment managers, correct?
A. By design. Once [the PPIF contracts] were signed, they had the authority to—to invest.
Joint App‘x at 320.
THE COURT: What‘s the basis of . . .[Willner‘s proposed testimony that statements such as Litvak‘s would not be] relevant to the fund‘s determination with respect to how much to pay are obvious [sic] misleading and unworthy of—how can he give that opinion? I can give an opinion that most lawyers lie, most shade the truth when asked about what they have done in discovery or not done in discovery. I can give an opinion? How can he give that opinion? What‘s the method either scientific, analytic, based on the peer review, based on the peer experience, what is his method?
MR. SMITH: Based upon his experience as well as education.
THE COURT: He doesn‘t care. That means that‘s an opinion and that proves that the market doesn‘t care?
MR. SMITH: What he could say [is that] he worked at many buy-side shops. It is widely understood this is how you approach it.
THE COURT: So anybody who works at a buy-side shop is an expert? So what makes him an expert?
MR. SMITH: I think we have laid it out in his CV, Judge.
THE COURT: He worked at those place[s], [] that‘s what makes him an expert?
MR. SMITH: He has a Ph.[D], your Honor. Finance and quantitative methods that [are] related to what his opinions are. The principal witness from Alliance Bernstein has a Ph.[D.] in finance that will be brought to bear.
THE COURT: He‘s testifying about whether somebody told him the light was red when it was green. He‘s not testifying about his Ph.[D].
Joint App‘x at 254-55.In light of the District Court‘s comments, we note that, for these purposes, “expert testimony does not [have to] rest on traditional scientific methods.” Davis v. Carroll, 937 F. Supp. 2d 390, 412 (S.D.N.Y. 2013). “Experts of all kinds tie observations to conclusions through the use of what Judge Learned Hand called ‘general truths derived from . . . specialized experience.‘” Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148-49 (1999) (quoting Learned Hand, Historical and Practical Considerations Regarding Expert Testimony, 15 Harv. L. Rev. 40, 54 (1901)). Thus, district courts must be mindful that “the Daubert factors do not all necessarily apply even in every instance in which reliability of scientific testimony is challenged, and in many cases, the reliability inquiry may instead focus upon personal knowledge and experience of the expert.” Davis, 937 F. Supp. 2d at 412 (internal quotation marks omitted). Indeed, courts regularly permit testimony similar to that which Litvak proposed Willner provide. See, e.g., United States v. Romano, 794 F.3d 317, 333 (2d Cir. 2015) (finding no abuse of discretion in admission of expert testimony regarding coin valuation even though “it is possible that [the expert‘s] methods are not entirely replicable because they are based in part on his personal experience as a coin dealer“); In re Blech Sec. Litig., No. 94 Civ. 7696, 2003 WL 1610775, at *21 (S.D.N.Y. Mar. 26, 2003) (admitting securities industry expert‘s testimony “as to what ordinary broker activity entails and as to the customs and practices of the industry“); SEC v. U.S. Envtl., Inc., No. 94 Civ. 6608, 2002 WL 31323832, at *3 (S.D.N.Y. Oct. 16, 2002) (admitting expert‘s testimony that “certain trading patterns would raise ‘red flags‘” based on expert‘s “knowledge of typical trading activity and the types of trading patterns that an experienced trader would recognize as irregular, and as such, are supported by his 30 years of experience in the securities industry“); see also Sawant v. Ramsey, 88 Fed. R. Evid. Serv. 862, 2012 WL 2046812, at *2 (D. Conn. 2012) (excluding securities expert‘s testimony “on the ‘materiality’ of the purported misrepresentations and omissions at issue . . . as a legal conclusion,” but noting that “in the context of a much more complicated segment of the stock market, expert testimony may be admissible as helpful to suggest ‘the inference which should be drawn from applying the specialized knowledge to the facts‘” (internal citations omitted)).
Joint App‘x at 645.[I]f it is something Mr. [Litvak] didn‘t know, then it can‘t go to a state of mind. If he‘s not on the documents, then there‘s no evidence he knew. Unless there‘s a witness who will say he told it to Mr. Litvak or Mr. Litvak said I knew about all of these, we were sitting in a room, et cetera, et cetera. But without that, I don‘t see how it is at all relevant under 401 and that‘s before I even get to a 403 issue of introducing evidence to the jury that effectively, its only purpose, it seems to me, is to suggest that everybody did it and therefore it isn‘t illegal, or we should feel sympathy for Mr. Litvak because he‘s the only one of all [the] other people who did it who is being prosecuted. I don‘t believe either of those arguments is an appropriate argument. Therefore I don‘t believe the evidence is appropriate.