An AllianceBernstein Holding LP (AB:US) executive said a spreadsheet mistakenly e-mailed to him showed that former Jefferies & Co. managing director Jesse Litvak lied about mortgage-backed securities trades.
Michael Canter, head of the securitized assets group at AllianceBernstein, testified today in New Haven, Connecticut, during the trial of Litvak, who is accused of defrauding investors of $2 million by using a U.S. bank bailout program to earn illegal profit for the firm.
Canter told the federal court jury that he received an e-mail from a colleague of the trader in November 2011 that mistakenly contained a spreadsheet detailing a history of bond trades at Jefferies. The document showed that Litvak had misled Canter about how much Jefferies had paid for bonds, including one instance where Canter agreed to raise a bid at Litvak’s request, yet Jefferies paid the original price.
Canter said Litvak apologized to him after being confronted following a long weekend, saying it was a “hard year” and that “guys were doing whatever they needed” to make money. Canter said he was “very angry” and started yelling at Litvak.
“It was clear to me that he was lying to us by asking us to improve our bid,” Canter said. “I said, ’I can’t believe you would do this to me. This is sort of personal.’”
Litvak is the only person charged with fraud in connection with an initiative to distribute more than $20 billion from the Troubled Asset Relief Program, or TARP, which used bailout funds to spur investment in mortgage-backed securities issued before 2009 that remained on the books of financial institutions. He’s accused of misrepresenting how much sellers were asking for the securities, or what customers would pay, keeping the difference for Jefferies.
Pools of home loans securitized into bonds were a central part of the housing bubble that burst, helping send the U.S. into the biggest recession since the 1930s. The largest global banks lost billions of dollars on mortgage-backed debt as U.S. home prices plunged and the market for such assets dried up.
While the securities rebounded after the crisis, markets remained illiquid with wide spreads between bids from buyers and sellers. Congress authorized the $700 billion rescue in October 2008. TARP, which spent $428 billion to stabilize banks including Citigroup Inc. and Morgan Stanley and fund bailouts of companies including American International Group Inc. and General Motors Co., will ultimately cost taxpayers $21 billion, the Congressional Budget Office has estimated.
Assistant U.S. Attorney Eric Glover said during opening statements yesterday that the spreadsheet sent to Canter brought Litvak’s alleged fraud to light. The defendant’s attorney, Patrick Smith, said Jefferies fired his client in order to make him look like a “rogue trader” and preserve its relationship with Canter and AllianceBernstein.
Canter told the jury today that he put Jefferies in “the penalty box” after confronting Litvak in November 2011, stopped doing business with the firm for about a month and hasn’t done much with Jefferies since.
“I don’t trust them,” said Canter, who was AllianceBernstein’s portfolio manager at the time with responsibility for the company’s public-private investment fund.
Litvak, a native of Denver who graduated from Emory University in Atlanta, was hired by Jefferies in April 2008 and was fired on Dec. 21, 2011, according to his indictment. He previously worked for RBS Greenwich Capital, according to records of the Financial Industry Regulatory Agency.
His arrest in January 2013 predated a wider probe into mortgage-backed securities at banks including JPMorgan Chase & Co. and UBS AG. Those firms received U.S. requests for information about trades during the financial crisis, people familiar with the probe previously said.
Litvak, 39, of Manhattan, was indicted the same month he was arrested on 10 counts of securities fraud, four counts of making false statements and one count of fraud connected to TARP. He pleaded not guilty and was freed on a $1 million bond.
He faces as long as 20 years in prison if convicted of securities fraud, the most serious count, at his trial before U.S. District Judge Janet C. Hall, which began with jury selection Feb. 3. He’s also accused in a Securities and Exchange Commission lawsuit of defrauding investors in more than 25 trades over two years.
Alleged victims include “numerous” investment funds, among them six established by the U.S. Treasury Department in 2009 as part of its response to the financial crisis, and private investment funds, prosecutors have said.
More than 100 firms applied to manage one of the nine funds established under the TARP initiative known as the Public-Private Investment Program. Each of those selected received $1.4 billion to $3.7 billion of bailout money to invest along with private capital. The program’s entire portfolio was liquidated as of Dec. 31, according to the office of Christy Romero, the special inspector general for TARP.
JPMorgan, the biggest U.S. lender by assets, disclosed the federal probe of its use of the funds in an August filing, saying it received subpoenas and requests for information from the SEC, the special inspector general for TARP and the U.S. Attorney’s Office in Connecticut.
New York-based Jefferies, which was acquired by Leucadia National (LUK:US) Corp. last year, in January agreed to pay $25 million to settle U.S. probes of suspected abuses in the trading of mortgage-backed securities.
The case is U.S. v. Litvak, 13-cr-00019, U.S. District Court, District of Connecticut (New Haven).
To contact the reporter on this story: Chris Dolmetsch in New York State Supreme Court in Manhattan at