On 8 December 2015, in United States v. Litvak, the federal appellate court based in New York reversed the conviction of Jesse Litvak, a bond trader at Jefferies & Company, because the trial court exceeded its authority when it excluded from trial evidence related to whether the information that the defendant allegedly misrepresented was material to a reasonable investor. The appellate court also held that the government did not need to prove that the defendant had an "intent to harm," but only a lower level of fraudulent intent, and that based on the evidence that was actually presented for most of the claims, a rational jury could have concluded that the defendant's misrepresentations were material. For a subset of claims related to statements made to the United States Department of the Treasury, however, the court held that the defendant's misstatements were not material in the context of those specific claims.
Litvak was convicted for fraudulently misrepresenting (i) to purchasers, the amount that Jefferies paid to acquire residential mortgage-backed securities ("RMBS"), (ii) to sellers, the price at which Jefferies agreed to resell RMBS and (iii) to purchasers, that Jefferies was acting as a middleman for another party trying to sell its RMBS even though Jefferies actually owned the securities already. After a fourteen-day trial in early 2014, Litvak was convicted on 15 counts of securities fraud for making these misrepresentations in numerous transactions with several counterparties. The appellate court held that based on the evidence that was presented at trial, including counterparties' testimony that the misrepresented facts were important to them, a rational jury could have concluded that Litvak's misrepresentations were material to the private parties that he transacted with. But the court went on to hold that the trial court improperly disallowed Litvak's presentation of expert testimony on what factors are relevant to the investment process of "reasonable" investors in the RMBS market. This excluded evidence was particularly relevant in light of the complex and subjective nature of the RMBS market. The court further held that the exclusion of this evidence was not "harmless," and therefore vacated Litvak's conviction and remanded the case for a new trial, because Litvak did not have other proof available to rebut the government's evidence of what information would be important to a reasonable RMBS investor.
After making this ruling, the court went on to issue several evidentiary rulings intended to provide guidance as to what other types of evidence are admissible on the issues of materiality and fraudulent intent. But the issue that led to the court's vacating Litvak's conviction was the exclusion of expert testimony about the investment decisions of investors in the opaque RMBS market. Parties facing charges of securities fraud should consider presenting expert testimony to show what information a reasonable investor in a particular market at issue would weigh in making investment decisions.
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