It's not often that you have a defense attorney saying his client's actions were like that of a used car salesman. But that's part of the defense being used for former bond trader Jesse Litfac In his second securities fraud trial. Litvac is accused of lying to customers about the prices of mortgage backed securities. He was found guilty in twenty fourteen, but an appeals court throughout his conviction, saying the judge
should have let expert witnesses testify. Federal prosecutors have cracked down on traders over mortgage bond pricing, bringing at least seven criminal fraud cases in the past three years. A conviction of former Jefferies and Company managing director Litfac will support those other cases. Our guests of Professor James Cox of Duke Law School and David Bissinger, a partner at
Bissinger Ashman and Williams Jim. In this opaque world of bond trading, the defense is arguing that Litvac was dealing with professionals who conduct their own research and know the value of the bonds they buy and sell. Does proof of that get him to an acquittal? No, It doesn't think, you know, the government never has to approve in these
cases that somebody actually relied upon a false statement. So that's a part of the defense that was raised, and I think the Second Circuit did a disservice to the law quite frankly by thinking that that was a relevant part. Now it does go to the question about materiality, but materiality doesn't even determine to a tend upon whether the lie was consequential of the fact is of material and
people go to prison for telling material lies. U by simply making a statement where the investor says, let me think about that, Oh, it doesn't change my mind, it can still. All it requires is that the investor pause over the information. So clearly, just to wrap up here, Clearly, statements that you were getting the bonds at a fair price,
but in fact they weren't. They marked up substantially, UH would have been something that least investor would have implaused about, and more likely the investor would say, wait a minute, if you disclose this fact to me that you had marked it up ten percent, then I'm not willing to pay that ten percent extra price. And it would have had a consequence. But the consequence is not part of the government's cases. It shouldn't be either. The second made
a mistake. Okay, well, given that perhaps they made a mistake, at least in Jim's opinion, David, what are we going to here now at the trial from these expert witnesses that fact is going to call the There's two witnesses.
There's a business school UH professor and bond analyst named Ram Wilner, and then a regulatory and compliance attorney named Mark Menchel, and both of them are going to testify in substance that UH lit Vac's misstatements or allegement statements, although at this point it's probably fair to say they are misstatements because we've already had the first trial in which he lost that, but that those misstatements are widely considered in the industry as quote biased, close quote and
open quote often misleading close quote. To June's point at the beginning of the broadcast, that you're gonna have UM the used car defense, and that the UH people dealing with Litvac, whether they were buying from or selling to Litvak UH knew that lit back statements that UH he was only going to be able to do certain things and his his limit, his his pricing and stuff was
limited limited because of the other side of the trade. Uh, those those states that that testimony will come in and it I think it will be of some use for lit back in at least showing the jury that Litvac was not doing something outside of what happens in the typical bond trading room. The jury may well think, well, that's the problem for the whole bond trading room. But it was an important issue for Litvac in the first trial because the prosecutors argued really in effect that Litvak
was at the epicenter of the fraud. I believe in the phrase they used in their rebuttal Jim and about thirty seconds that we have here, Securities Industry and Financial Markets Association's affirm that broker dealers aren't required to disclose the prices they pay for bonds. Will that affect the jury? You know, it's going to have an influence on the jury. But I think what the also will be disclosed there is that there are guidelines even for by Fenrop about
how much of a markup you can have. So the idea would be, maybe don't have to disclose it. But the question is what your is your behavior within kind of the rules of the road of the industry, And this gets into question about where the whole industry is corrupt. The Fenderous position would be, no, Jim, why is this case important enough for prosecutors to be pursuing it for a second time? You know? The problem of markets, particularly in the bond market, of UH, you know, is an
ongoing problem. I don't I don't think it's pervasive in the sense that and we don't know whether it's true or false, but it's hard to believe that it's It's across the market, every traders marketing it up the same way lit Back was doing. UH. But it's important to send the signal out to the market that this is a market that um important to America, is important to the world, and and and and that needs to be
a fair market. So I think that that in and of itself justifies being delivered here and UH with a lot of certitude going forward. The second thing is that the reasoning of the second circuit it's just crazy, quite frankly, and perhaps there's an opportunity here by showing that the defense didn't really work, which is what we have to wait and see what happens in the second trial. Well will new to that that that court's opinions, this is just one of several opinions handed down by the Second
Circuit that I think we're very questionable. We saw the Supreme Court pretty much reversing part of that inside of trading case US against Newhaman this term, uh, it's it's it's not the paragon of wisdom that the Second Circuit used to be. So I think that that's that's important
as well. And third, once you mentioned earlier June, and that is you have other prosecutions that could worse where there was a settlement that could be unwound, should look back be successful, David, the you know, Jim's alluded to the reasoning of the court, and when you read the court's opinion, the Second Circuit's opinion, it's sort of one
of them. That's sort of interesting about is it almost seems to say that the reason it's okay to make misstatements to these buyers is that they are so sophisticated they wouldn't really rely on this information. So is the Second Circuit really think we expect to hear the trial that it depends on who's buying whether or not you
can lie to them. Well, I would say that the Second circuits first opinion, first opinion did not go quite that far because that that original opinion, and in December UH said the rejected Litbax argument that misstatements were somehow immaterialism a matter of law. In other words, the Second Circuit said that should go to the jury. So I don't think that the Second Circuit was totally off its rocker.
I think the thing that happened in the trial court, and this is me coming at this case as a trial lawyer, is that the way the district court, the trial court prevented Mr lit Back from putting on this expert testimony, the so called everybody does it expert testimony, And then the government in the closing argument and the rebuttal, when Mr Litvack did not have the opportunity to speak anymore, the government stood up and said, essentially Mr lit Back
was at the middle of this, nobody else, that Jeffreys did this, and and this was you know, Mr Litvack essentially acting alone. And the testimony, of course from these
experts is no, that isn't the case. UH. And so I think just as a practical matter, looking at the way the case was tried, I think that's as big of a problem uh for the government, or was this big of a problem for the government as it was saying the second circuit being completely off on policy grounds, And I think that, um, you know, one of the one of the points about this case that is so sensitive to the government is this is part money. Uh
so the government is well with it. It's right, I think to at least want to pursue the you know, expenditure of part money, especially in an atmosphere in which securities commissions and trading costs continue to go down. I mean today's news as you prepare for this article, you see continuing pressure on commissions and so forth. So why should traders be able to get these big fat markups?
And Mr Liffack is gonna face the serious problem because these witnesses that the government is calling from, say places like Alliance Burnstey not necessarily. I mean, these are sophisticated people are gonna say, we discovered what Mr Liffack was doing, we stopped doing business with them, and uh with Mr Liftack because of that. Uh And and this is not the way it ought to be done. So I think that Mr Liftack has an uphill uh, definitely an up
hill road to climb here. Still, but the second circuits, reasoning on the expert witness issued again from from the trial overs perspective, I think uh was was worthy of a reversal. Jim, did this case cause banks to reevaluate their policies, um, and to go away from the idea of negotiating tactics considered like puffery? Well, my, my, myjest. The banks probably aren't taken in by puffery because puffery
is sort of general statements. It's hard to think that when somebody is actually manipulating the price that we'd ever concealed that um probably boxed it up as puffery. I do think, I do think that the cases that were brought in the in the pervasiveness of serious markups should cause the banks that want to take a look at
what the fairness of the market is. And you know, we we didn't talk about earlier, but the possibility that maybe the banks actually expressed interest and continuing prosecutions for these cases because they're the victims of these cases. Um uh and so um, you know, we don't know, but I think the notoriety that surrounds the lift back case prosecution and and and the other cases around with it certainly shine a light on conduct that should have aroused
the the self preservation instincts of the banks. David. One of the one of the questions that sort of comes up as you read through all this and think about how the trial's gonna go is whether or not how particular this this decision is, that is, as a particular to the bond market, or is this going to how could this conceivably of wider implications depending on how on how lid Fect does at the trial. Well, I think the focus of this really is the bond market in
the sense that security markets are so transparent. I mean, there's so much public pricing and putting aside questions about high frequency trading and so forth. Uh the spread on your typical equity trade is, you know, usually within pennies. But the bond mark it is this case exemplified. Uh the spread in a say a sixty dollar bond, seveny dollar bond could be as much as a dollar dollar fifty, sometimes even more. And uh So the bond market historically
has been much more opaque. Yet it's a much bigger part of the securities market. So the amount of money made by bond traders is you know, really really substantial. And again, in this atmosphere of compressed trading, continually compressed trading costs. I think the episode, I think the target here will be the bond market. But that's a big target. Jim about a minute ago. So in a retrial, lit Vac knows what the government is going to present against him.
This time, he is also able to introduce expert witnesses. Is it still an uphill battle for him? I think I think it is. I mean, you know, I get before a jury not among the favorite species in America these days. Uh you know, did not we were not candid. I think the used car analogy evaporates. You know, it's one thing for the persons they belonged to a little od ladies school teacher, okay, your little man school teacher. It's another thing to set the odometer back. This is
setting the odometer back. I don't think people are gonna like that. So I think I think he's got an uphill battle. Uh um, yeah, So it'll be interesting to see. I wondered when I saw that as well, whether you want to tell a jury that someone's like a used car salesman. Thank you both for being Thanks for you both for being on Bloomberg Law. That's Professor James Cox of Duke Law School and David Bissing. You're a partner at Bissing. Your Ashman and Williams