Speaker 1: It's not often that you have a defense attorney saying
Speaker 1: his client's actions were like that of a used car salesman.
Speaker 1: But that's part of the defense being used for former
Speaker 1: bond trader Jesse Litfac In his second securities fraud trial.
Speaker 1: Litvac is accused of lying to customers about the prices
Speaker 1: of mortgage backed securities. He was found guilty in twenty fourteen,
Speaker 1: but an appeals court throughout his conviction, saying the judge
Speaker 1: should have let expert witnesses testify. Federal prosecutors have cracked
Speaker 1: down on traders over mortgage bond pricing, bringing at least
Speaker 1: seven criminal fraud cases in the past three years. A
Speaker 1: conviction of former Jefferies and Company managing director Litfac will
Speaker 1: support those other cases. Our guests of Professor James Cox
Speaker 1: of Duke Law School and David Bissinger, a partner at
Speaker 1: Bissinger Ashman and Williams Jim. In this opaque world of
Speaker 1: bond trading, the defense is arguing that Litvac was dealing
Speaker 1: with professionals who conduct their own research and know the
Speaker 1: value of the bonds they buy and sell. Does proof
Speaker 1: of that get him to an acquittal? No, It doesn't think,
Speaker 1: you know, the government never has to approve in these
Speaker 1: cases that somebody actually relied upon a false statement. So
Speaker 1: that's a part of the defense that was raised, and
Speaker 1: I think the Second Circuit did a disservice to the
Speaker 1: law quite frankly by thinking that that was a relevant part.
Speaker 1: Now it does go to the question about materiality, but
Speaker 1: materiality doesn't even determine to a tend upon whether the
Speaker 1: lie was consequential of the fact is of material and
Speaker 1: people go to prison for telling material lies. U by
Speaker 1: simply making a statement where the investor says, let me
Speaker 1: think about that, Oh, it doesn't change my mind, it
Speaker 1: can still. All it requires is that the investor pause
Speaker 1: over the information. So clearly, just to wrap up here, Clearly,
Speaker 1: statements that you were getting the bonds at a fair price,
Speaker 1: but in fact they weren't. They marked up substantially, UH
Speaker 1: would have been something that least investor would have implaused about,
Speaker 1: and more likely the investor would say, wait a minute,
Speaker 1: if you disclose this fact to me that you had
Speaker 1: marked it up ten percent, then I'm not willing to
Speaker 1: pay that ten percent extra price. And it would have
Speaker 1: had a consequence. But the consequence is not part of
Speaker 1: the government's cases. It shouldn't be either. The second made
Speaker 1: a mistake. Okay, well, given that perhaps they made a mistake,
Speaker 1: at least in Jim's opinion, David, what are we going
Speaker 1: to here now at the trial from these expert witnesses
Speaker 1: that fact is going to call the There's two witnesses.
Speaker 1: There's a business school UH professor and bond analyst named
Speaker 1: Ram Wilner, and then a regulatory and compliance attorney named
Speaker 1: Mark Menchel, and both of them are going to testify
Speaker 1: in substance that UH lit Vac's misstatements or allegement statements,
Speaker 1: although at this point it's probably fair to say they
Speaker 1: are misstatements because we've already had the first trial in
Speaker 1: which he lost that, but that those misstatements are widely
Speaker 1: considered in the industry as quote biased, close quote and
Speaker 1: open quote often misleading close quote. To June's point at
Speaker 1: the beginning of the broadcast, that you're gonna have UM
Speaker 1: the used car defense, and that the UH people dealing
Speaker 1: with Litvac, whether they were buying from or selling to
Speaker 1: Litvak UH knew that lit back statements that UH he
Speaker 1: was only going to be able to do certain things
Speaker 1: and his his limit, his his pricing and stuff was
Speaker 1: limited limited because of the other side of the trade. Uh,
Speaker 1: those those states that that testimony will come in and
Speaker 1: it I think it will be of some use for
Speaker 1: lit back in at least showing the jury that Litvac
Speaker 1: was not doing something outside of what happens in the
Speaker 1: typical bond trading room. The jury may well think, well,
Speaker 1: that's the problem for the whole bond trading room. But
Speaker 1: it was an important issue for Litvac in the first
Speaker 1: trial because the prosecutors argued really in effect that Litvak
Speaker 1: was at the epicenter of the fraud. I believe in
Speaker 1: the phrase they used in their rebuttal Jim and about
Speaker 1: thirty seconds that we have here, Securities Industry and Financial
Speaker 1: Markets Association's affirm that broker dealers aren't required to disclose
Speaker 1: the prices they pay for bonds. Will that affect the jury?
Speaker 1: You know, it's going to have an influence on the jury.
Speaker 1: But I think what the also will be disclosed there
Speaker 1: is that there are guidelines even for by Fenrop about
Speaker 1: how much of a markup you can have. So the
Speaker 1: idea would be, maybe don't have to disclose it. But
Speaker 1: the question is what your is your behavior within kind
Speaker 1: of the rules of the road of the industry, And
Speaker 1: this gets into question about where the whole industry is corrupt.
Speaker 1: The Fenderous position would be, no, Jim, why is this
Speaker 1: case important enough for prosecutors to be pursuing it for
Speaker 1: a second time? You know? The problem of markets, particularly
Speaker 1: in the bond market, of UH, you know, is an
Speaker 1: ongoing problem. I don't I don't think it's pervasive in
Speaker 1: the sense that and we don't know whether it's true
Speaker 1: or false, but it's hard to believe that it's It's
Speaker 1: across the market, every traders marketing it up the same
Speaker 1: way lit Back was doing. UH. But it's important to
Speaker 1: send the signal out to the market that this is
Speaker 1: a market that um important to America, is important to
Speaker 1: the world, and and and and that needs to be
Speaker 1: a fair market. So I think that that in and
Speaker 1: of itself justifies being delivered here and UH with a
Speaker 1: lot of certitude going forward. The second thing is that
Speaker 1: the reasoning of the second circuit it's just crazy, quite frankly,
Speaker 1: and perhaps there's an opportunity here by showing that the
Speaker 1: defense didn't really work, which is what we have to
Speaker 1: wait and see what happens in the second trial. Well
Speaker 1: will new to that that that court's opinions, this is
Speaker 1: just one of several opinions handed down by the Second
Speaker 1: Circuit that I think we're very questionable. We saw the
Speaker 1: Supreme Court pretty much reversing part of that inside of
Speaker 1: trading case US against Newhaman this term, uh, it's it's
Speaker 1: it's not the paragon of wisdom that the Second Circuit
Speaker 1: used to be. So I think that that's that's important
Speaker 1: as well. And third, once you mentioned earlier June, and
Speaker 1: that is you have other prosecutions that could worse where
Speaker 1: there was a settlement that could be unwound, should look
Speaker 1: back be successful, David, the you know, Jim's alluded to
Speaker 1: the reasoning of the court, and when you read the
Speaker 1: court's opinion, the Second Circuit's opinion, it's sort of one
Speaker 1: of them. That's sort of interesting about is it almost
Speaker 1: seems to say that the reason it's okay to make
Speaker 1: misstatements to these buyers is that they are so sophisticated
Speaker 1: they wouldn't really rely on this information. So is the
Speaker 1: Second Circuit really think we expect to hear the trial
Speaker 1: that it depends on who's buying whether or not you
Speaker 1: can lie to them. Well, I would say that the
Speaker 1: Second circuits first opinion, first opinion did not go quite
Speaker 1: that far because that that original opinion, and in December
Speaker 1: UH said the rejected Litbax argument that misstatements were somehow
Speaker 1: immaterialism a matter of law. In other words, the Second
Speaker 1: Circuit said that should go to the jury. So I
Speaker 1: don't think that the Second Circuit was totally off its rocker.
Speaker 1: I think the thing that happened in the trial court,
Speaker 1: and this is me coming at this case as a
Speaker 1: trial lawyer, is that the way the district court, the
Speaker 1: trial court prevented Mr lit Back from putting on this
Speaker 1: expert testimony, the so called everybody does it expert testimony,
Speaker 1: And then the government in the closing argument and the rebuttal,
Speaker 1: when Mr Litvack did not have the opportunity to speak anymore,
Speaker 1: the government stood up and said, essentially Mr lit Back
Speaker 1: was at the middle of this, nobody else, that Jeffreys
Speaker 1: did this, and and this was you know, Mr Litvack
Speaker 1: essentially acting alone. And the testimony, of course from these
Speaker 1: experts is no, that isn't the case. UH. And so
Speaker 1: I think just as a practical matter, looking at the
Speaker 1: way the case was tried, I think that's as big
Speaker 1: of a problem uh for the government, or was this
Speaker 1: big of a problem for the government as it was
Speaker 1: saying the second circuit being completely off on policy grounds,
Speaker 1: And I think that, um, you know, one of the
Speaker 1: one of the points about this case that is so
Speaker 1: sensitive to the government is this is part money. Uh
Speaker 1: so the government is well with it. It's right, I
Speaker 1: think to at least want to pursue the you know,
Speaker 1: expenditure of part money, especially in an atmosphere in which
Speaker 1: securities commissions and trading costs continue to go down. I
Speaker 1: mean today's news as you prepare for this article, you
Speaker 1: see continuing pressure on commissions and so forth. So why
Speaker 1: should traders be able to get these big fat markups?
Speaker 1: And Mr Liffack is gonna face the serious problem because
Speaker 1: these witnesses that the government is calling from, say places
Speaker 1: like Alliance Burnstey not necessarily. I mean, these are sophisticated
Speaker 1: people are gonna say, we discovered what Mr Liffack was doing,
Speaker 1: we stopped doing business with them, and uh with Mr
Speaker 1: Liftack because of that. Uh And and this is not
Speaker 1: the way it ought to be done. So I think
Speaker 1: that Mr Liftack has an uphill uh, definitely an up
Speaker 1: hill road to climb here. Still, but the second circuits,
Speaker 1: reasoning on the expert witness issued again from from the
Speaker 1: trial overs perspective, I think uh was was worthy of
Speaker 1: a reversal. Jim, did this case cause banks to reevaluate
Speaker 1: their policies, um, and to go away from the idea
Speaker 1: of negotiating tactics considered like puffery? Well, my, my, myjest.
Speaker 1: The banks probably aren't taken in by puffery because puffery
Speaker 1: is sort of general statements. It's hard to think that
Speaker 1: when somebody is actually manipulating the price that we'd ever
Speaker 1: concealed that um probably boxed it up as puffery. I
Speaker 1: do think, I do think that the cases that were
Speaker 1: brought in the in the pervasiveness of serious markups should
Speaker 1: cause the banks that want to take a look at
Speaker 1: what the fairness of the market is. And you know,
Speaker 1: we we didn't talk about earlier, but the possibility that
Speaker 1: maybe the banks actually expressed interest and continuing prosecutions for
Speaker 1: these cases because they're the victims of these cases. Um
Speaker 1: uh and so um, you know, we don't know, but
Speaker 1: I think the notoriety that surrounds the lift back case
Speaker 1: prosecution and and and the other cases around with it
Speaker 1: certainly shine a light on conduct that should have aroused
Speaker 1: the the self preservation instincts of the banks. David. One
Speaker 1: of the one of the questions that sort of comes
Speaker 1: up as you read through all this and think about
Speaker 1: how the trial's gonna go is whether or not how
Speaker 1: particular this this decision is, that is, as a particular
Speaker 1: to the bond market, or is this going to how
Speaker 1: could this conceivably of wider implications depending on how on
Speaker 1: how lid Fect does at the trial. Well, I think
Speaker 1: the focus of this really is the bond market in
Speaker 1: the sense that security markets are so transparent. I mean,
Speaker 1: there's so much public pricing and putting aside questions about
Speaker 1: high frequency trading and so forth. Uh the spread on
Speaker 1: your typical equity trade is, you know, usually within pennies.
Speaker 1: But the bond mark it is this case exemplified. Uh
Speaker 1: the spread in a say a sixty dollar bond, seveny
Speaker 1: dollar bond could be as much as a dollar dollar fifty,
Speaker 1: sometimes even more. And uh So the bond market historically
Speaker 1: has been much more opaque. Yet it's a much bigger
Speaker 1: part of the securities market. So the amount of money
Speaker 1: made by bond traders is you know, really really substantial.
Speaker 1: And again, in this atmosphere of compressed trading, continually compressed
Speaker 1: trading costs. I think the episode, I think the target
Speaker 1: here will be the bond market. But that's a big target.
Speaker 1: Jim about a minute ago. So in a retrial, lit
Speaker 1: Vac knows what the government is going to present against him.
Speaker 1: This time, he is also able to introduce expert witnesses.
Speaker 1: Is it still an uphill battle for him? I think
Speaker 1: I think it is. I mean, you know, I get
Speaker 1: before a jury not among the favorite species in America
Speaker 1: these days. Uh you know, did not we were not candid.
Speaker 1: I think the used car analogy evaporates. You know, it's
Speaker 1: one thing for the persons they belonged to a little
Speaker 1: od ladies school teacher, okay, your little man school teacher.
Speaker 1: It's another thing to set the odometer back. This is
Speaker 1: setting the odometer back. I don't think people are gonna
Speaker 1: like that. So I think I think he's got an
Speaker 1: uphill battle. Uh um, yeah, So it'll be interesting to see.
Speaker 1: I wondered when I saw that as well, whether you
Speaker 1: want to tell a jury that someone's like a used
Speaker 1: car salesman. Thank you both for being Thanks for you
Speaker 1: both for being on Bloomberg Law. That's Professor James Cox
Speaker 1: of Duke Law School and David Bissing. You're a partner
Speaker 1: at Bissing. Your Ashman and Williams