Expert Witness Exclusion Gets Bond Trader New Trial
A securities fraud conviction has been vacated and sent back for a new trial by a federal appeals court based on the exclusion of securities expert witness testimony.
In United States v. Litvak, No. 14-2902 (2d Cir. 2015), a jury found former Jefferies Group LLC bond trader Jesse Litvak guilty in March 2014 of lying to customers about the price he had paid for mortgage-backed bonds and pocketing the difference, on average pocketing more than $100,000 per transaction.
The cases comes out of the U.S. government's banking bailout ("Troubled Asset Relief Program") under which the Treasury Department authorized private money managers to use taxpayer funds to buy some of the bonds. Charges are pending against brokers at other banks on similar allegations, according to the Wall Street Journal.
Litvak's defense had sought to introduce the securities expert witness Ram Willner, PhD, a former bond manager and finance expert at Bank of America, Morgan Stanley, and PIMCO, as well as a business school professor. Willner was to opine that Litvak's misrepresentations to his victims was immaterial, and opine on the fiduciary duties of Litvak's victims to their investors, whether the bonds were traded at a fair market value, the victims' later profits and the volatility of the RMBS bond market.
The Second U.S. Circuit Court of Appeals, in vacating Litvak's conviction, noted specifically that Willner was to have given 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'". The district court had found that testimony proffered by Willner to be potentially prejudicial and confusing to the jury.
The appeals court found that if Litvak's defense had been allowed to introduce some of Willner's testimony, a jury might have acquitted him. Excluding Willner's testimony was sufficiently harmful on its own to vacate Litvak's convictions for securities fraud and remand for a new trial.
Litvak is part of a wider probe into whether banks deliberately mispriced some types of mortgage bonds and cheated clients in the years following the financial crisis.
The decision is a setback for the prosecution of Litvak and others on Wall Street under similar allegations of defrauding customers by inflating the prices of mortgage-backed securities. However, the legal argument of securities fraud in these cases still stands. The appeals court did not agree with Litvak that his "misstatements" were immaterial. The court found that a rational jury could conclude that Litvak's misstatements were indeed material.