United States v. Litvak

889 F.3d 56 (2nd Cir. 2018)

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Nature of the Case

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Facts

This appeal follows the second trial on ten counts of securities fraud. Appellant was acquitted on nine of the ten counts, each involving transactions similar to the one for which he was convicted. In January 2013, P filed an indictment charging D with eleven counts of securities fraud in violation of 15 U.S.C. §§ 78j(b), 78ff along with one court for fraud against TARP and four counts for making false statements. The instruments were RMBS. D worked as a bond trader at Jefferies & Company. D bought and sold RMBS. RMBS are large and complex aggregations of residential mortgages and home equity loans. Holders of RMBS receive coupon payments derived from homeowner payments on mortgages. RMBS are bought and sold at very high prices. The single bond involved in the sole count of conviction was conveyed for over $23 million. Each RMBS has unique features affecting its value. There is no public list of RMBS available for sale or of the financial terms of ongoing transactions. When institutional investors are interested in buying or selling RMBS, they contact registered broker-dealers such as Jefferies to find interested buyers or sellers. Investors may also buy and sell RMBS directly with broker-dealers that hold RMBS in their own accounts. RMBS are bought or sold through 'inventory trades,' 'order trades,' or 'bids-wanted-in-competition trades.' In an inventory trade, an investor buys a bond already held in a broker-dealer's account. In an order trade, a broker-dealer communicates with an interested buyer and seller and, if successful, effectuates a transaction in which a RMBS is transferred. A RMBS investor may approach a broker-dealer to express interest in buying or selling a RMBS in a certain price range. Or a broker-dealer may approach an investor to gauge its interest in buying or selling a bond in a certain price range. The broker-dealer owns the bond, but usually briefly, in consummating the transaction between the two investors. A BWIC trade is similar to an order trade, except that a BWIC trade involves an auction in which a putative seller sends a bid-list to multiple broker-dealers. These broker-dealers solicit expressions of interest and price ranges from potential buyers. The broker-dealer then places a bid in the auction of a particular security. The bid price is selected by the broker-dealer and may well differ from prices suggested by putative buyers. If the broker-dealer's bid is successful, the broker-dealer buys the bond and then offers to sell it to the interested investor. Communications are generally carried out through online instant messages. A broker-dealer is compensated with reference to either the 'all-in' or 'on-top' price. An 'all-in' price is the total price the investor is (the broker-dealer hopes) to pay a broker-dealer for a bond. It does not refer to the price at which the broker-dealer purchased the bond. An 'on-top' price refers to the difference between the price the broker-dealer paid for the bond and the price at which the broker-dealer will sell the bond -- the 'on-top' price is the broker-dealer's profit. In 'on-top' trades, the broker-dealer's profit is sometimes referred to colloquially as a 'commission,' 'markup,' or 'spread.' In general, inventory trades are quoted as 'all-in' prices. Negotiations over order or BWIC trades may refer to the broker-dealer's acquisition cost and the 'on-top' price. The broker-dealer acts solely in its interest as a principal. A broker-dealer is not an agent for its counterparties in these trades and owes them no special or fiduciary duty. Any final price is determined in an arms-length negotiation and, if agreed upon, will be somewhere in the overlap of price ranges. In the first trial, D was convicted on all counts apart from Count Seven, which had been dismissed before trial. The court reversed the judgment of conviction on the counts alleging fraud against TARP and making false statements. The court vacated D's convictions on the securities fraud counts but remanded for a new trial on those counts. P sought to prove the element of materiality in the securities fraud counts through the testimony of representatives of D's counterparties. They testified that they considered D's misstatements to be important in deciding whether to sell or buy the RMBS in question. The excluded experts were also to testify as to the 'arm's-length nature of the relationship between a broker-dealer and counterparty.' The court noted that the existence of an agency relationship was of 'great import,' because, if such a relationship existed, D's misstatements would have been more important to a reasonable investor while, if such a relationship was lacking, the misstatements would have been less so. D was retried on the ten securities fraud counts and the jury convicted D on one count. D was selling a RMBS in a BWIC trade to Invesco Ltd., an investment management company with nearly $1 trillion of assets under management. D circulated the bid-list to Brian Norris, who represented Invesco. Invesco's credit research team determined that Invesco would make a worthwhile profit on a particular RMBS on the list, SARM 2005-21 7A1 if the purchase price were at, or under, $80 per $100 of face value. Norris suggested to D that he bid 79-24 for the bond, and further told D that he had 'some room' to bid higher than 79-24. D purchased the bond and informed Norris that Jefferies won the auction, stating in an online chat that 'I bid your level.' D had bid and purchased the bond for 79-16. Norris then proposed to buy the bond from D for 79-30. D accepted, saying '6/32s is great. The difference between fourteen ticks and six amounts to $73,018.53. Invesco paid Jefferies approximately $23.6 million. Norris testified that he believed D to be his agent and that broker-dealers 'serve as an agent in between [buyers and sellers].' D had never been Norris's agent, and an agency relationship did not exist in such transactions. P argued that D 'chose to establish a relationship of trust to lead them all to think that he was trustworthy.' The district court instructed the jury that D was not an agent of Norris or Invesco. D was found guilty and appealed.