The U.S. Court of Appeals for the Second Circuit ("Second Circuit") overturned the securities fraud conviction of a former bond trader. The Second Circuit found that the District Court erred by admitting certain testimony by the counterparty to the bond trade at issue.

Jesse Litvak was a bond trader at the brokerage firm Jefferies LLC ("Jefferies"), who traded residential mortgage-backed securities ("RMBS"). In the first, and best known, of a series of similar cases brought by the government, Mr. Litvak was criminally charged for misleading customers about the prices Jefferies paid for bonds and the profits earned by the firm in its trading. At trial, a jury convicted him of one count of securities fraud. Mr. Litvak's primary argument on appeal was that his misstatements were not material to RMBS investors as a matter of law. The Second Circuit rejected this argument and concluded that a jury could find that the misstatements were material. However, the Second Circuit determined that the District Court materially erred in allowing a representative of the counterparty in the transaction underlying the conviction to testify that he mistakenly believed Mr. Litvak was his agent. Accordingly, the Second Circuit vacated the conviction and remanded to the District Court for further proceedings.

This is the second time that the Second Circuit has overturned Mr. Litvak's conviction in this case. He was originally convicted of securities fraud in 2014. The Second Circuit overturned that conviction in 2016, determining that the District Court had erred by excluding expert testimony that the false statements at issue were not material to RMBS investors.

Mr. Litvak had been serving a two-year prison sentence. After the Second Circuit's Opinion, he was released from prison pending further proceedings.

Commentary / Kyle DeYoung

The Second Circuit's decision is another big win for Mr. Litvak and highlights the difficulty the government faces in prosecuting these kinds of cases. However, the decision is based on pretty narrow grounds and preserves the government's primary theory of the case, which is that Mr. Litvak should not have lied about the price he paid for the bonds. It is unclear whether the decision will cause the government to change its approach in other active cases and it seems unlikely that it will change regulators' expectations regarding the conduct of securities traders.

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