United States v. Litvak

Decision Date08 December 2015
Docket NumberNo. 14–2902–CR.,14–2902–CR.
Parties UNITED STATES of America, Appellee, v. Jesse C. LITVAK, Defendant–Appellant.
CourtU.S. Court of Appeals — Second Circuit

Kannon K. Shanmugam, (Dane H. Butswinkas, Allison B. Jones, Masha G. Hansford, on the brief), Williams & Connolly LLP, Washington, DC, for Jesse C. Litvak.

Jonathan N. Francis (Heather Cherry, Sandra S. Glover, on the brief), Assistant United States Attorneys, for Deirdre M. Daly, United States Attorney for the District of Connecticut, New Haven, CT.

Before: STRAUB, PARKER and CARNEY, Circuit Judges.

STRAUB, Circuit Judge:

After trial in the District of Connecticut (Janet C. Hall, Chief Judge ), a jury convicted DefendantAppellant Jesse C. Litvak of various charges of securities fraud, fraud against the United States, and making false statements. On appeal, Litvak challenges these convictions on several grounds.

First, Litvak contends that, for the purposes of the fraud against the United States and making false statements counts, the evidence adduced at trial provided an insufficient basis for a rational jury to conclude that his misstatements were material to the Department of the Treasury, the pertinent government entity. We agree, and accordingly reverse the District Court's judgment of conviction as to those charges.

Second, Litvak argues that his misstatements were, as a matter of law, immaterial to a reasonable investor, which would require reversal of the securities fraud counts as well. However, because a rational jury could conclude that Litvak's misstatements were material, the materiality inquiry—a mixed question of fact and law—was properly reserved for the jury's determination.

Third, Litvak claims that, in respect of the scienter element of the securities fraud counts, the evidence was insufficient to support the verdict and that the District Court failed adequately to instruct the jury. Because Litvak is incorrect that "contemplated harm" is a requisite component of the scienter element of securities fraud, we reject this challenge.

Fourth, Litvak asserts a number of evidentiary errors at trial. We agree that the exclusion of certain proffered expert testimony exceeded the District Court's allowable discretion, and that such error was not harmless. Accordingly, we vacate the District Court's judgment of conviction as to the securities fraud charges and remand for a new trial. Because the other evidentiary rulings that Litvak challenges on appeal are likely to be at issue on remand, we also address those claims and conclude that the District Court exceeded its allowable discretion in certain of those rulings as well.

BACKGROUND

The charges in this case arise from Litvak's conduct as a securities broker and trader at Jefferies & Company ("Jefferies"), a global securities broker-dealer and investment banking firm.1

In January 2013, the government filed an indictment charging Litvak with eleven counts of securities fraud, see 15 U.S.C. §§ 78j(b), 78ff (Counts 1–11), one count of fraud against the United States, see 18 U.S.C. § 1031 (Count 12), and four counts of making false statements, see 18 U.S.C. § 1001 (Counts 13–16). The indictment alleged that Litvak made three kinds of fraudulent misrepresentations to several of Jefferies's counterparties, some of which were Public–Private Investment Funds ("PPIFs"),2 in order to covertly reap excess profit for Jefferies in the course of transacting residential mortgage-backed securities ("RMBS").3 First, the indictment alleged that Litvak fraudulently misrepresented to purchasing counterparties the costs to Jefferies of acquiring certain RMBS. Second, the indictment alleged that Litvak fraudulently misrepresented to selling counterparties the price at which Jefferies had negotiated to resell certain RMBS. Third, the indictment alleged that Litvak fraudulently misrepresented to purchasing counterparties that Jefferies was functioning as an intermediary between the purchasing counterparty and an unnamed third-party seller, where in fact Jefferies owned the RMBS and no third-party seller was extant.

In February and March 2014, a fourteen-day trial by jury was held on the charges described above, except for Count Seven (a securities fraud charge), which was dismissed on the government's motion the day before trial commenced. "Viewing the evidence, as we must, in the light most favorable to the government," United States v. McGinn, 787 F.3d 116, 120 (2d Cir.2015), we find that the jury could have reasonably concluded the following from the evidence adduced at trial.

As a bond trader at Jefferies during the relevant time period, Litvak bought and sold RMBS on Jefferies's behalf, sometimes as a middleman (holding the RMBS only briefly when facilitating a transaction between two other parties) and sometimes holding the RMBS for a longer period of time in Jefferies's "inventory." Joint App'x at 376. Between 2009 and 2011, Litvak made three types of misrepresentations to representatives of the counterparties with whom he transacted on Jefferies's behalf in order to increase Jefferies's profit margin on the transactions in which he engaged. First, he misrepresented to purchasing counterparties Jefferies's acquisition costs of certain RMBS. For example, in the course of the transaction at issue in Counts One, Twelve and Thirteen, Litvak falsely represented to Michael Canter, a representative of the AllianceBernstein Legacy Securities Fund ("AllianceBernstein Fund"), a PPIF, that Jefferies had purchased certain RMBS at a price of $58.00 (based on $100.00 face value), when in fact Litvak knew that Jefferies had purchased those securities at $57.50.4 Jefferies subsequently sold the securities to the AllianceBernstein Fund at a price of $58.00. Canter testified that this difference would have "mattered" and been "important" to him.5 Id. at 381. If Jefferies and the AllianceBernstein Fund had instead transacted at a price of $57.50, the Fund would have paid approximately $60,000 less for the securities (the total cost was approximately $12 million).

Second, Litvak misrepresented to selling counterparties the price at which Jefferies had negotiated to resell certain RMBS. In the course of the transaction at issue in Count Eight, for example, Litvak falsely stated to a representative of York Capital Management ("York"), a hedge fund that owned certain RMBS, that Litvak had arranged for Jefferies to resell those securities to a third party at a price of $61.25 (based on $100.00 face value). Litvak and York's representative, Kathleen Corso, agreed that Jefferies would purchase the securities from York at a price of $61.00, in order to allow Jefferies to reap a $0.25 profit when resold to the third party at $61.25. However, Litvak had actually arranged for Jefferies to resell the securities to the third party at a price of $62.375. Indeed, York sold the securities to Jefferies at a price of $61.00 and Jefferies then resold the securities to the third party at a price of $62.375 (for a profit of $1.375). Corso testified that this difference would have been "important" to her.6 Id. at 576. If Jefferies and York had instead transacted at a price of $62.125, providing Jefferies with a profit of $0.25, as Litvak had represented to Corso, Jefferies would have paid York approximately $228,500 more for the securities (the total cost was approximately $20 million).

Third, Litvak misrepresented to purchasing counterparties that Jefferies was functioning as an intermediary between the purchasing counterparty and an unnamed third-party seller, where in fact Jefferies owned the RMBS and no third-party seller existed. In the course of the transaction at issue in Count Eleven, for example, Litvak falsely represented to a representative of Magnetar Capital ("Magnetar"), a hedge fund, that Litvak was actively negotiating with a seller of certain RMBS (i.e., acting as a middleman) when, in fact, Litvak knew that Jefferies held the securities in its inventory. Litvak's negotiations with Vladimir Lemin, Magnetar's representative, began with Lemin's offer to purchase the securities at a price of $50.50. Litvak then described to Lemin a fictional back-and-forth between himself and an unnamed, non-existent third-party seller, which concluded with Litvak's false representation to Lemin that he had contemporaneously purchased the securities on Jefferies's behalf at a price of $53.00. Lemin then agreed for Magnetar to purchase from Jefferies the securities at a price of $53.25, in order to allow Jefferies to reap a $0.25 profit (or "commission") when resold. Id. at 543. However, the securities purchased from Jefferies by Magnetar were actually held in Jefferies's inventory and had been acquired by Jefferies several days prior at a price of $51.25. Lemin testified that this distinction reflected "a very different situation" from that which he understood at the time of the transaction.7 Id. at 544. If Jefferies and Magnetar had instead transacted at a price of $53.00, the agreed-upon transaction price of $53.25 less the understood $0.25 "commission" for Jefferies, Magnetar would have paid Jefferies approximately $14,000 less for the securities (the total cost was approximately $5.5 million).

At the conclusion of the trial, the jury convicted Litvak of securities fraud (Counts 1–6, 8–11), fraud against the United States (Count 12), and making false statements (Counts 13–16). Litvak moved for judgment of acquittal or, in the alternative, a new trial on several grounds, including those raised on appeal. The District Court denied Litvak's motion in a published opinion, see United States v. Litvak, 30 F.Supp.3d 143 (D.Conn.2014), and sentenced him to 24 months' imprisonment, three years' supervised release, and a $1.75 million fine.

This timely appeal followed. A prior panel of this Court granted Litvak's motion for release pending appeal because he "raised a substantial question of law or fact likely to result in reversal." Order...

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