The long-running criminal case against Jesse Litvak seems to have come to an end, with the U.S. Attorney’s Office for the District of Connecticut filing a motion yesterday seeking voluntary dismissal of the sole remaining charge.[1]  This action—which has resulted in the government twice obtaining a criminal conviction against Litvak, only to see both convictions overturned by the Second Circuit—raised somewhat novel questions of the materiality of information a broker-dealer provides about its own costs or profit margins to sophisticated counterparties.  Notably, even while seeking dismissal, the Government again reiterated its view that the legal theory it pursued, and which the Second Circuit twice appeared to credit, remains sound and (presumably) actionable in future cases.[2]

Litvak, a former trader at Jefferies & Co., was criminally charged in January 2013 with multiple counts of securities fraud and other fraud charges in connection with the Troubled Asset Relief Program.[3]  The Government alleged, among other things, that Litvak misrepresented to his customers the prices he paid (or would pay) for residential mortgage backed securities (“RMBS”), which had the effect of inducing customers to overpay or undersell.[4]  A critical question in the case was whether Litvak’s purportedly false and misleading statements were material, or whether, as the defense maintained, buyers and sellers did not attach particular importance to a counterparty’s statement, but rather relied on their own pricing models.[5]

The first jury agreed with the Government, convicting Litvak of all charges presented.[6]  However, the Second Circuit vacated Litvak’s conviction.  While it rejected Litvak’s argument that his statements about price could not be material as a matter of law, it agreed that the jury should have been presented with defense evidence that RMBS traders relied on their own valuation procedures and not a counterparty’s statements of value.[7]  The second time around, the jury returned a conviction on a single count of securities fraud.  On May 3, 2018, the Second Circuit again vacated the conviction.  First, the court acknowledged that Litvak’s statements could have been material to an objective reasonable investor:  “[t]he broker-dealer’s profit is part of the price and lies about it can be found by a jury to significantly alter the total mix of information available.”[8]  However, the court likewise found that the evidence the Government adduced to demonstrate materiality—testimony from a counterparty who believed incorrectly that Litvak acted as his agent and thus owed him a fiduciary duty—was overly prejudicial and should not have been admitted at trial.  The court found that “it can hardly be the law that the ‘point of view’ . . . of an investor who is admitted to be wrong . . . is relevant to prove what a reasonable investor, neither confused nor incorrect, would have deemed important.”[9]  In other words, Litvak’s counterparty was not reasonable in his belief as to the duties Litvak owed and, thus, his testimony could not satisfy the securities law’s hypothetical reasonable investor standard.[10]  In finding that this evidence “was evidently of great importance to the jury” and was “the only rational reason for the jury to have convicted [Litvak]” on the securities fraud count while “acquitting him on all other counts,” the Second Circuit concluded that its admission “was not harmless and requires a vacatur.”[11]

The Government has now moved to dismiss the action—choosing to forego a third trial, notwithstanding that the two Second Circuit decisions were arguably decided on relatively narrow technical grounds, and otherwise generally credited the Government’s theory of the case (i.e., that statements and omissions by a trader concerning his firm’s costs were material misrepresentations that support a securities fraud charge). In moving to dismiss, however, the Government made clear that it was not abandoning its theory of the case, writing in its motion to dismiss that “[t]wo juries have found [Litvak] guilty of securities fraud, the Court and the Second Circuit have twice found there was sufficient evidence to support those convictions, and the Second Circuit has twice validated the Government’s prosecution theory . . . .”[12]

The Government’s dismissal of its charges against Livtak, therefore, should not be interpreted as an indication that the Government will never consider similar charges in the future.  But the case—and the decision not to press forward with a third trial—certainly highlights the challenges for the Government in proving materiality of alleged misstatements about pricing and profits made in arms-length transactions between sophisticated traders.  Even though the Litvak saga will likely end with the dismissal of charges, given that the Second Circuit has twice ruled that such statements could be material and actionable, broker-dealers and other traders are well advised to ensure that statements made to counterparties—even statements regarding profit margins and other trade terms not typically disclosed or obviously relied upon by counterparties—be either fully accurate or go unmade.

[1] Government’s Motion to Dismiss Count Four, U.S. v. Litvak, 13 Cr. 19 (JCH), Docket Entry 599.

[2] For a fuller discussion of the Second Circuit’s decisions in this case see Second Circuit Again Reverses Fraud Conviction of RMBS Trader Litvak, Cleary Enforcement Watch (May 8, 2018),

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] U.S. v. Litvak, 889 F.3d 56, 62 (2d Cir. 2018).

[8] Id. at 67.

[9] Id. at 69.

[10] Id. (“While the individual views of a counterparty trader may usually be relevant to the nature of the market involved and as to the beliefs of a reasonable investor, a reasonable investor would not misperceive the role of a broker-dealer in the RMBS market.”).

[11] Id. at 70, 72.

[12] Government’s Motion to Dismiss Count Four, U.S. v. Litvak, 13 Cr. 19 (JCH), Docket Entry 599.