Ex-Jefferies & Co. trader Jesse Litvak's former customers told a jury during his fraud trial in Connecticut that lies and misrepresentations are common and part of the give-and-take of bond trading.

Litvak, 39, is on trial in federal court in New Haven, Connecticut, accused of defrauding investors of $2 million by lying on trades of mortgage-backed securities. He's the only person charged with fraud in connection with an initiative to distribute more than $20 billion from the Troubled Asset Relief Program (TARP), which the U.S. government created during the 2008 credit crisis 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 a bond purchase was 57 cents on the dollar because anything more than that wouldn't provide a 10 percent yield.

Under cross-examination from John Hillebrecht, one of Litvak's attorneys, Wollman admitted he told another broker that he'd get a 10 percent yield at 58 cents on the dollar, and that he wasn't telling the whole truth to Litvak. The charges against Litvak include claiming that a third party was selling the bonds when Jefferies was the actual holder. 022514_Bloomberg_PQ2

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

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

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

While the securities rebounded after the crisis, markets remained illiquid, with wide spreads between bids from buyers and sellers. Congress authorized the $700 billion rescue in October 2008. TARP used bailout funds to spur investment in mortgage-backed securities issued before 2009 that remained on the books of financial institutions.

Another of Litvak's former customers, Vladimir Lemin of Magnetar Capital LLC, said yesterday under cross-examination from Patrick Smith, another attorney representing Litvak, that he had to take possible misrepresentations from the other side into account when doing deals.

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

Skepticism Appropriate

“You want the other guy to believe something that may not be entirely 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 in mortgages, it is appropriate to use skepticism.” The perception that the other side either withholds information or tells falsehoods “is exactly why I don't say 'How high?' when they tell me to jump,” Lemin said.

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

He faces as many as 20 years in prison if convicted of securities 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 University in Atlanta, was hired by Jefferies in April 2008 and was fired on Dec. 21, 2011, according to his indictment. He previously worked for RBS Greenwich Capital, according to records of the Financial Industry Regulatory Agency.

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

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

Litvaks's alleged victims include six funds established by the Treasury Department in 2009 as part of its response to the financial crisis, and private investment funds, prosecutors have said.

AIG, General Motors

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

More than 100 firms applied to manage one of the nine funds established under the TARP initiative known as the Public-Private Investment 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 inspector general for TARP.

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

Instant Insights /

Lies Just Part of Bond Trader's Job

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