By Justin Baer And Julie Steinberg
It is the age-old art of sealing a deal: Making your product
seem more desirable than it may actually be.
But on Wall Street, where traders for decades have tried to
cajole clients into buying or selling, the question of how far they
can go has become pivotal.
Ever since former Jefferies Group LLC trader Jesse Litvak was
sentenced in July 2014 to two years in prison for lying to
customers about how much he had paid for securities, Wall Street
executives have been rethinking the rules of engagement.
Long-acceptable trading tactics--pretending to have paid more for a
bond than one had, for example, or embellishing how many potential
buyers may be interested in a particular security--have become
potential criminal offenses.
"The fact that he [was convicted] for doing what appears to have
been fairly widespread really shook the industry," said Lee
Richards, a partner at white-collar defense law firm Richards,
Kibbe & Orbe LLP and a former federal prosecutor. He added that
some traders "had come to believe that everyone in the business
told white lies."
Mr. Litvak's lawyer and federal prosecutors will return to court
in downtown Manhattan on Wednesday to deliver oral arguments on his
appeal. The arguments come as multiple regulatory and
law-enforcement probes are exploring instances in which other
traders may have misled clients on complex bond deals, according to
people familiar with the matter.
Banks are trying to pre-empt whatever enforcement actions may
loom, and adapt to the new landscape.
Some banks now specifically restrict what information traders
are permitted to provide to their counterparties at other firms.
Several banks also are heightening surveillance of their traders.
Others are holding mandatory training to try to keep their traders
out of trouble.
Banks making changes in response to the Litvak case include
Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., Bank of
America Corp., J.P. Morgan Chase & Co. and Barclays PLC,
according to people familiar with the matter.
In some cases, the banks are issuing new internal policies,
while in others the firms are clarifying policies that were
previously vague.
"We've always said in this business that there are lies and
there are bond lies," said one veteran mortgage-bond trader who now
works at a money-management firm. "They're like white lies. You're
not transacting in a market with grandma...the guy on the other
side is doing the same thing."
A jury in federal court found Mr. Litvak guilty in March 2014 of
securities fraud and making false statements to clients, a verdict
that reverberated across Wall Street and stunned many bank
executives. Mr. Litvak, now 40 years old, was found to have misled
customers about what he paid for certain bonds that he was selling
to them. The customers included money managers and large hedge
funds, which discovered Mr. Litvak's tactics when he accidentally
sent a spreadsheet to one of them showing what his firm actually
paid for the securities. One of the portfolio managers alerted
federal authorities. Mr. Litvak was terminated by Jefferies in
2011.
The former trader appealed, arguing that his clients were
sophisticated investors who made their own decisions on the value
of the bonds they purchased.
The court granted Mr. Litvak's motion for bail in October
because it said that he had raised "a substantial question of law
or fact likely to result in...reversal" of the conviction.
A reversal on appeal will likely affect the similar
investigations under way. Matthew Katke, a former Royal Bank of
Scotland trader, pleaded guilty to committing securities fraud last
month. But in an unusual agreement, Mr. Katke can withdraw his plea
if Mr. Litvak's appeal finds that he didn't commit securities
fraud.
Mr. Litvak's attorney declined to comment, as did Mr.
Katke's.
The U.S. Department of Justice, the Securities and Exchange
Commission and the special inspector general for the Troubled Asset
Relief Program, or Sigtarp, are exploring instances in which bank
traders may have cheated clients on complex bond deals, according
to people familiar with the matter.
Barclays, Citigroup, Deutsche Bank, Goldman, Morgan Stanley, RBS
and UBS AG were among those firms under scrutiny, The Wall Street
Journal reported last year.
The new training sessions at banks such as J.P. Morgan and Bank
of America are expected to continue regardless of the result of Mr.
Litvak's appeal, people familiar with those banks said. At J.P.
Morgan, the discussions have been driven by both the trial and
broader regulatory factors.
Other banks, including Deutsche Bank and Citigroup, have stepped
up their surveillance of traders. While big gains and shortfalls
have long set off alarm bells, some firms are now scrutinizing more
trades in which the profits and losses aren't quite as
eye-catching, people familiar with those banks said. Goldman is
developing new policies on traders' communications, including
limits on what they can say about their past trades, according to a
person familiar with the matter.
"The best practice would be to be truthful, or not to say
anything at all, especially in writing these conversations in
instant messages," said Elizabeth Baird, a partner at Morgan, Lewis
& Bockius LLP and a one-time bond trader. "A lot of it is using
good judgment. Don't make a misrepresentation on something that's a
fact--especially a knowable fact."
Jefferies, which is owned by Leucadia National Corp., said in
January 2014 it agreed to pay $25 million to resolve a U.S. probe
into Mr. Litvak's behavior. The firm reached a nonprosecution
agreement with the U.S. attorney's office in Connecticut and a
civil settlement with the SEC.
As part of its settlement with U.S. authorities, Jefferies
agreed to hire a compliance consultant, develop new standards and
review them at least annually. A Jefferies spokesman declined to
comment Tuesday.
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