Ex-Jefferies & Co. trader Jesse Litvak's former customerstold a jury during his fraud trial in Connecticut that lies andmisrepresentations are common and part of the give-and-take of bondtrading.

Litvak, 39, is on trial in federal court in New Haven,Connecticut, accused of defrauding investors of $2 million by lyingon trades of mortgage-backed securities. He's the only personcharged with fraud in connection with an initiative to distributemore than $20 billion from the Troubled Asset Relief Program(TARP), which the U.S. government created during the 2008 creditcrisis to help bail out banks.

Joel Wollman, a portfolio manager with QVT Financial LP,testified yesterday that he told Litvak that his firm's limit for abond purchase was 57 cents on the dollar because anything more thanthat wouldn't provide a 10 percent yield.

Under cross-examination from John Hillebrecht, one of Litvak'sattorneys, Wollman admitted he told another broker that he'd get a10 percent yield at 58 cents on the dollar, and that he wasn'ttelling the whole truth to Litvak. The charges against Litvakinclude claiming that a third party was selling the bonds whenJefferies was the actual holder.

“Volunteering information would not give me an edge, keepinginformation would give me an edge,” Wollman said.

“My lying is part” of making deals, he said, “although Igenerally consider myself a truthful person.”

Pools of home loans securitized into bonds were a central partof the housing bubble that burst, helping send the U.S. into thebiggest recession since the 1930s. The largest global banks lostbillions of dollars on mortgage-backed debt as U.S. home pricesplunged and the market for such assets dried up.

While the securities rebounded after the crisis, marketsremained illiquid, with wide spreads between bids from buyers andsellers. Congress authorized the $700 billion rescue in October2008. TARP used bailout funds to spur investment in mortgage-backedsecurities issued before 2009 that remained on the books offinancial institutions.

Another of Litvak's former customers, Vladimir Lemin of MagnetarCapital LLC, said yesterday under cross-examination from PatrickSmith, another attorney representing Litvak, that he had to takepossible misrepresentations from the other side into account whendoing deals.

In a transaction with Magnetar, Litvak is accused of creating afake seller of bonds that Jefferies already owned, lying about theprice that it had already paid, and pocketing the markup.

Skepticism Appropriate

“You want the other guy to believe something that may not beentirely accurate,” Smith asked Lemin, Magnetar's assets manager.“Isn't that the case?”

“It is one of the strategies,” Lemin said. “For what I do inmortgages, it is appropriate to use skepticism.” The perceptionthat the other side either withholds information or tellsfalsehoods “is exactly why I don't say 'How high?' when they tellme to jump,” Lemin said.

Litvak, of Manhattan, was indicted the same month he wasarrested on 10 counts of securities fraud, four counts of makingfalse statements, and one count of fraud connected to TARP. Hepleaded not guilty and was freed on a $1 million bond. He's alsobeen sued by the U.S. Securities & Exchange Commission.

He faces as many as 20 years in prison if convicted ofsecurities fraud, the most serious count, at his trial before U.S.District Judge Janet C. Hall, which began with jury selection Feb.3.

Litvak, a native of Denver who graduated from Emory Universityin Atlanta, was hired by Jefferies in April 2008 and was fired onDec. 21, 2011, according to his indictment. He previously workedfor RBS Greenwich Capital, according to records of the FinancialIndustry Regulatory Agency.

His arrest in January 2013 predated a wider probe intomortgage-backed securities at banks including JPMorgan Chase &Co. and UBS AG. Those firms received U.S. requests for informationabout trades during the financial crisis, people familiar with theprobe previously said.

Opening statements began Feb. 18 and prosecutors have said theyexpected to rest their case as soon as today. Smith has said heintends to put on a defense that will last about three days. Hehasn't said whether Litvak will testify in his own defense.

Litvaks's alleged victims include six funds established by theTreasury Department in 2009 as part of its response to thefinancial crisis, and private investment funds, prosecutors havesaid.

AIG, General Motors

TARP, which spent $428 billion to stabilize banks includingCitigroup Inc. and Morgan Stanley and fund bailouts of companiesincluding American International Group Inc. and General Motors Co.,will ultimately cost taxpayers $21 billion, the CongressionalBudget Office has estimated.

More than 100 firms applied to manage one of the nine fundsestablished under the TARP initiative known as the Public-PrivateInvestment Program. Each of those selected received $1.4 billion to$3.7 billion of bailout money to invest along with private capital.The program's entire portfolio was liquidated as of Dec. 31,according to the office of Christy Romero, the special inspectorgeneral for TARP.

The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court,District of Connecticut (New Haven).

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