Case , Document 51-1, 11/18/2014, , Page1 of cr UNITED STATES OF AMERICA, APPELLEE JESSE C. LITVAK, DEFENDANT-APPELLANT

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1 Case , Document 51-1, 11/18/2014, , Page1 of cr In the United States Court of Appeals for the Second Circuit UNITED STATES OF AMERICA, APPELLEE v. JESSE C. LITVAK, DEFENDANT-APPELLANT ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT (CRIM. NO ) (THE HONORABLE JANET C. HALL, C.J.) BRIEF OF DEFENDANT-APPELLANT KANNON K. SHANMUGAM DANE H. BUTSWINKAS ALLISON B. JONES MASHA G. HANSFORD WILLIAMS & CONNOLLY LLP 725 Twelfth Street, N.W. Washington, DC (202)

2 Case , Document 51-1, 11/18/2014, , Page2 of 69 TABLE OF CONTENTS Page Statement of jurisdiction... 1 Statement of the issues... 1 Statement of the case... 2 A. Background... 3 B. The relevant trades The charged conduct Valuing the securities Negotiations between Mr. Litvak and the managers The Troubled Asset Relief Program C. The proceedings at trial The parties theories The exclusion of Mr. Litvak s evidence Closing arguments D. Post-trial proceedings Summary of argument Standard of review Argument I. Mr. Litvak s misstatements were immaterial as a matter of law II. A. The misstatements were immaterial under circuit precedent B. The misstatements would also be immaterial under the common law C. The government s theory of liability would dramatically expand criminal liability for statements made in the course of negotiations The government did not prove, and the district court did not properly instruct the jury concerning, fraudulent intent A. Section 10(b) requires proof of contemplated harm (i)

3 Case , Document 51-1, 11/18/2014, , Page3 of 69 Table of contents continued: III. Page B. The evidence in this case was insufficient to prove contemplated harm C. The district court failed to instruct the jury on contemplated harm The district court abused its discretion in excluding Mr. Litvak s evidence A. The district court erroneously excluded Mr. Litvak s expert testimony and evidence on fair market value B. The district court erroneously excluded evidence demonstrating Mr. Litvak s good faith C. The district court s errors were not harmless IV. The evidence was insufficient to prove violations of Section 1001 and A. The evidence was insufficient to prove materiality to the Treasury B. The evidence was insufficient to prove a matter within the jurisdiction of the Treasury V. The TARP-fraud jury instruction constructively amended the indictment Conclusion TABLE OF AUTHORITIES CASES Page Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609 (7th Cir. 2012) Barnett v. Kirshner, 527 F.2d 781 (2d Cir. 1975) ii

4 Case , Document 51-1, 11/18/2014, , Page4 of 69 Cases continued: Page Byrd v. Rautman, 36 A (Md. 1897) Doe v. New York City Department of Social Services, 649 F.2d 134 (2d Cir. 1981) Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539 (2d Cir. 1996)... 23, 24, 30 Kotteakos v. United States, 328 U.S. 750 (1946) Kungys v. United States, 485 U.S. 759 (1988) Marx & Co. v. Diners Club, Inc., 550 F.2d 505 (2d Cir. 1977)... 44, 46 McCaw v. O Malley, 249 S.W. 41 (Mo. 1923) Merrill Lynch & Co., Research Reports Securities Litigation, In re, 289 F. Supp. 2d 416 (S.D.N.Y. 2003)... 31, 33 Mills v. Polar Molecular Corp., 12 F.3d 1170 (2d Cir. 1993) Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876 (2d Cir. 1972) Ripy v. Cronan, 115 S.W. 791 (Ky. 1909) SEC v. Holschuh, 694 F.2d 130 (7th Cir. 1982) SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968) Steiner v. Hughes, 44 P.2d 857 (Okla. 1935) United States v. Avasso, 23 Fed. Appx. 33 (2d Cir. 2001) United States v. Ballistrea, 101 F.3d 827 (2d Cir. 1996) United States v. Berger, 473 F.3d 1080 (9th Cir. 2007) United States v. Blum, 62 F.3d 63 (2d Cir. 1995)... 48, 49 iii

5 Case , Document 51-1, 11/18/2014, , Page5 of 69 Cases continued: Page United States v. Brandt, 196 F.2d 653 (2d Cir. 1952) United States v. Candella, 487 F.2d 1223 (2d Cir. 1973)... 54, 55 United States v. Certified Environmental Services, Inc., 753 F.3d 72 (2d Cir. 2014)... 41, 46, 47, 49 United States v. Chandler, 98 F.3d 711 (2d Cir. 1996)... 38, 40 United States v. Coffman, 574 Fed. Appx. 541 (6th Cir. 2014) United States v. Collorafi, 876 F.2d 303 (2d Cir. 1989) United States v. Coplan, 703 F.3d 46 (2d Cir. 2012) United States v. D Amato, 39 F.3d 1249 (2d Cir. 1994) United States v. Daly, 842 F.2d 1380 (2d Cir. 1988) United States v. DeSantis, 134 F.3d 760 (6th Cir. 1998) United States v. Diallo, 40 F.3d 32 (2d Cir. 1994)... 47, 48 United States v. Edgar, 82 F.3d 499 (1st Cir. 1996) United States v. Forrester, 60 F.3d 52 (2d Cir. 1995) United States v. Foshee, 578 F.2d 629 (5th Cir. 1978) United States v. Grimm, 738 F.3d 498 (2d Cir. 2013) United States v. Heimann, 705 F.2d 662 (2d Cir. 1983) United States v. Mahaffy, Crim. No , 2006 WL (E.D.N.Y. Aug. 2, 2006) United States v. McDonough, 56 F.3d 381 (2d Cir. 1995)... 56, 57 United States v. Milstein, 401 F.3d 53 (2d Cir. 2005) iv

6 Case , Document 51-1, 11/18/2014, , Page6 of 69 Cases continued: Page United States v. Mucciante, 21 F.3d 1228 (2d Cir. 1994) United States v. Nadi, 996 F.2d 548 (2d Cir. 1993) United States v. Novak, 443 F.3d 150 (2d Cir. 2006)... passim United States v. O Hagan, 521 U.S. 642 (1997) United States v. Onumonu, 967 F.2d 782 (2d Cir. 1992)... 45, 47 United States v. Owen, 500 F.3d 83 (2d Cir. 2007) United States v. Regan, 937 F.2d 823 (2d Cir. 1991) United States v. Regent Office Supply Co., 421 F.2d 1174 (2d Cir. 1970)... passim United States v. Rigas, 490 F.3d 208 (2d Cir. 2007)... 22, 51, 52 United States v. Rodgers, 466 U.S. 475 (1984)... 54, 55 United States v. Rossomando, 144 F.3d 197 (2d Cir. 1998) United States v. Service Deli Inc., 151 F.3d 938 (9th Cir. 1998) United States v. Starr, 816 F.2d 94 (2d Cir. 1987)... passim United States v. Tureseo, 566 F.3d 77 (2d Cir. 2009) United States v. Vilar, 729 F.3d 62 (2d Cir. 2013)... 22, 31 United States v. Viloski, 557 Fed. Appx. 28 (2d Cir. 2014) United States v. Wallach, 935 F.2d 445 (2d Cir. 1991) United States v. Whitman, 904 F. Supp. 2d 363 (S.D.N.Y. 2012), aff d, 555 Fed. Appx. 98 (2d Cir.), cert. denied, 135 S. Ct. 352 (2014)... 32, 33 Vernon v. Keys, 104 Eng. Rep. 246 (K.B. 1810)... 27, 28 v

7 Case , Document 51-1, 11/18/2014, , Page7 of 69 Case continued: Page Worrell & Williams v. Kinnear Manufacturing Co., 49 S.E. 988 (Va. 1905) STATUTES AND RULES 12 U.S.C U.S.C. 5231a Securities Exchange Act of 1934, Pub. L. No , 48 Stat U.S.C. 78j(b) ( 10(b))... passim 15 U.S.C. 78ff ( 32) U.S.C passim 18 U.S.C passim 18 U.S.C U.S.C U.S.C C.F.R b , 32, 33, C.F.R b-10 (2011) C.F.R (1973) Fed. R. Crim. P Fed. R. Evid Fed. R. Evid , 45 MISCELLANEOUS Black s Law Dictionary (7th ed. 1999) vi

8 Case , Document 51-1, 11/18/2014, , Page8 of 69 Miscellaneous continued: Page Black s Law Dictionary (9th ed. 2009) Robert H. Frank, Passions Within Reason (1988) H.R. Rep. No (1988) William Williamson Kerr, A Treatise on the Law of Fraud and Mistake (2d ed. 1883)... 25, 26, 28 Model Rules of Professional Conduct R. 4.1 cmt Eleanor Holmes Norton, Bargaining and the Ethic of Process, 64 N.Y.U. L. Rev. 493 (1989) Scott R. Peppet, Can Saints Negotiate? A Brief Introduction to the Problems of Perfect Ethics in Bargaining, 7 Harv. Negot. L. Rev. 83 (2002) James J. White, Machiavelli and the Bar: Ethical Limitations on Lying in Negotiation, 1980 Am. B. Found. Res. J. 926 (1980) vii

9 Case , Document 51-1, 11/18/2014, , Page9 of 69 STATEMENT OF JURISDICTION The district court had jurisdiction under 18 U.S.C The district court entered final judgment on July 25, S.A. 27. Appellant filed a timely notice of appeal on August 5, J.A The jurisdiction of this Court rests on 28 U.S.C STATEMENT OF THE ISSUES 1. Whether appellant s misstatements during negotiations for the sale of bonds were immaterial as a matter of law because they did not relate to the bonds value. 2. a. Whether the government failed to present sufficient evidence that appellant acted with fraudulent intent. b. Whether the district court erred by omitting contemplated harm from its jury instruction on fraudulent intent. 3. Whether the district court abused its discretion in excluding expert testimony and evidence supporting appellant s immateriality and goodfaith defenses. 4. a. Whether the government failed to present sufficient evidence that appellant s misstatements were material to the Treasury. b. Whether the district court erred by omitting the requirement of materiality to the Treasury from its jury instruction. (1)

10 Case , Document 51-1, 11/18/2014, , Page10 of 69 c. Whether the government failed to present sufficient evidence that appellant s statements were made in a matter within the Treasury s jurisdiction. 5. Whether the district court s jury instruction on fraud against the Troubled Asset Relief Program constructively amended the indictment. STATEMENT OF THE CASE In this case the first of its kind the government prosecuted appellant Jesse Litvak, a bond trader, for statements he made in the course of negotiations with professional investment managers for the purchase or sale of certain bonds. In some of the transactions at issue, Mr. Litvak concededly misstated the amount of profit his employer would make; in others, he misstated the reason he was unwilling to accept a less favorable price. Critically, however, in neither case did Mr. Litvak make any misstatements concerning the value of the bonds transacted. Consequently, when Mr. Litvak sold a bond to a counterparty, the counterparty paid a price it was willing to pay for precisely the bond it expected to, and did, receive. On the theory that the counterparties were nevertheless victims of a fraud, the government prosecuted Mr. Litvak for securities fraud, fraud against the Troubled Asset Relief Program, and making false statements, and a jury convicted him of those charges. The district court, Judge Janet C. Hall, sentenced Mr. Litvak to 24 months of imprisonment, and this Court 2

11 Case , Document 51-1, 11/18/2014, , Page11 of 69 granted Mr. Litvak s motion for release pending this appeal. Because the government s theory of the case was fatally flawed, the judgment of the district court should be reversed. In the alternative, because the district court committed numerous errors that prevented Mr. Litvak from fully presenting his defense, the judgment should be vacated and the case remanded for a new trial. A. Background At the time of the trades at issue, Mr. Litvak worked as a bond trader at Jefferies & Company. Jefferies is a broker-dealer a firm in the business of buying and selling securities. At Jefferies, Mr. Litvak transacted bonds with professionals at firms that manage investment funds. In the relevant transactions, Jefferies would acquire title to a bond and then either resell the bond immediately or hold it in inventory. J.A (Canter). The bonds at issue here are a type of residential mortgage-backed securities (RMBS), which consist of pools of mortgages issued to homebuyers. J.A. 362 (Canter). Although the bonds had high credit ratings when they were originally issued, mortgage holders subsequently defaulted at far higher rates than expected. As a result, at the time of the relevant trades, the bonds were trading at a substantial discount from their original face value. J.A. 369 (Canter). Precisely for that reason, however, the bonds were a potentially attractive investment. J.A. 421 (Canter). Because of market volatil- 3

12 Case , Document 51-1, 11/18/2014, , Page12 of 69 ity, there was a range of prices at which smart expert[s] were willing to transact those bonds. J.A. 403 (Canter). At the time of the relevant trades, a two-point spread was common in the market: i.e., if a dealer was willing to buy a bond for $60, 1 it would be willing to sell it for $62, marking it up by 3.3% of its value. J.A. 403 (Canter). B. The Relevant Trades 1. The Charged Conduct The indictment in this case was filed in the District of Connecticut on January 25, J.A. 33. It charged Mr. Litvak with eleven counts of securities fraud under 15 U.S.C. 78j(b) and 78ff (Counts 1-11); one count of fraud against the Troubled Asset Relief Program (TARP) under 18 U.S.C (Count 12); and four counts of making false statements on a matter within the government s jurisdiction under 18 U.S.C (Counts 13-16). The stated basis for the latter two sets of counts was that the counterparties for some of the charged trades managed funds in which the Treasury had invested pursuant to the Public-Private Investment Program (PPIP). On the eve of trial, the government dismissed one of the securities-fraud counts (Count 7). J.A It is undisputed that, while transacting bonds at Jefferies, Mr. Litvak made misstatements to the professional investment managers with whom he 1 All of the bond prices in this brief are per $100 of face value. 4

13 Case , Document 51-1, 11/18/2014, , Page13 of 69 traded about the portion of the transaction price that would represent a profit to Jefferies. Take, for example, the trade charged in Count 3. While negotiating the sale of that bond, Mr. Litvak said that he acquired it at a price of $ The investment manager then offered to buy the bond at $67.78, and the trade occurred at that price. In reality, Mr. Litvak had acquired the bond for $67.47, so Jefferies actually earned a profit of 0.46% (rather than 0.18%). J.A. 377 (Canter). It is also undisputed that, in other transactions, Mr. Litvak referred to a nonexistent third-party seller with whom he pretended to negotiate in order to obtain the bond for the buyer. For example, in the trade charged in Count 11, Mr. Litvak told the manager that he had a third-party seller willing to sell the bond for $55. The manager offered $ A few minutes later, the manager followed up, asking to finish off this negotiation before you show [the bond]... to other investors that you are in touch with. J.A. 542 (Lemin). Mr. Litvak responded that the seller had come down to $54, then $53.50, and added that he had to beat [the seller] up pretty good to get there. J.A The negotiation continued, with Mr. Litvak saying that the seller came down to $53.25, then $53; Mr. Litvak and the manager agreed to a final price of $ While the manager believed Jefferies had acquired the bond for $53, there was in reality no third-party seller; the bond was one that Jefferies already held in its inventory. J.A (Lemin). 5

14 Case , Document 51-1, 11/18/2014, , Page14 of 69 Notably, with regard to all of the relevant trades, Jefferies was a principal acting for its own account; that is, it acquired each bond and then made a profit by selling it at a price higher than its acquisition cost. See, e.g., J.A. 377, (Canter); J.A It was not an agent transacting for a customer s account. As a result, Mr. Litvak was not obligated to disclose to the counterparties Jefferies profit on a transaction. J.A. 404 (Canter); see 17 C.F.R b-10 (2011). Under industry guidelines, Jefferies could make undisclosed profits of up to 10% for the bonds in the relevant non-inventory trades. J.A Jefferies deemed a markup of 4% or less to be acceptable without requiring justification to a supervisor, and the markup on each of Mr. Litvak s non-inventory trades was less than 4%. J.A. 750 (Eveland); J.A Specifically, Mr. Litvak made between $0.25 and $1.90 in profit for Jefferies on the relevant non-inventory trades, for an average of $0.88. J.A , According to the evidence at trial, a reasonable amount of profit at the time for a non-inventory trade of this type of security was $1.00 to $2.00. J.A (Eveland). As for the size of the misrepresentations, Mr. Litvak misstated Jefferies profit in the relevant trades by between $0.06 and $1.75, for an average of $0.56. J.A , For inventory trades, Jefferies could mark the bond up to any price the market would bear, because the value of a bond naturally fluctuates during the time it is in inventory. J.A (Norris). 6

15 Case , Document 51-1, 11/18/2014, , Page15 of Valuing The Securities At trial, several of the managers with whom Mr. Litvak transacted who testified as the government s own witnesses explained that their firms had relied on sophisticated models to value the bonds at issue. See, e.g., J.A. 500 (Norris) (stating that we were fairly dependent, almost exclusively dependent[,] on what the output of our research team gave us ); J.A (Wollman) (testifying similarly about reliance on his own analytics). In order to determine its valuation of a bond, a research team at the counterparty firm performed an analysis of various attributes of the mortgages constituting the bond, including the rate of voluntary prepayment, the rate of default, and the percentage of principal lost in case of a foreclosure. J.A (Canter); J.A. 498 (Norris). Using those inputs, the firms estimated the value of the revenue streams associated with the constituent mortgages for each bond which allowed the firm to assess whether the bond was a good deal at a particular price. J.A. 420 (Canter). Critically, the size of Jefferies profit on a potential trade did not factor into a firm s analysis. See, e.g., J.A. 427 (Canter) (stating that there s no model input for the dealer s cost ); J.A. 437 (Canter) (stating that it was not necessary to know Jefferies profit in order to conduct investment analysis in deciding how much to pay for a bond ); J.A. 498 (Norris) (testifying that [t]here s no separate input for any fees ). Accordingly, as the managers 7

16 Case , Document 51-1, 11/18/2014, , Page16 of 69 conceded at trial, Mr. Litvak s statements did not affect their valuation of the bonds. See, e.g., J.A. 481 (Vlajinac) (stating that misrepresentations concerning the existence of a third-party seller and the acquisition cost did not affect my thinking about the bond itself ); J.A (Norris) (testifying that nothing about [Mr. Litvak s] tactics or what he said... changed the economics of buying that bond at [$79.94] on that day or affected the nature or quality of the bond ). Underscoring the insignificance of Jefferies profit to the counterparties, the amount of that profit was not separately broken out on any of the trade confirmations. Rather, the trade confirmations included only one price field for the final transaction price. See J.A. 536 (Wollman); J.A. 559 (Lemin); J.A Nor did the counterparties track broker-dealer profits. J.A. 499 (Norris). To the contrary, as the managers testified, what mattered to the counterparties in making an investment decision was the bond s final price. See, e.g., J.A. 561 (Lemin) (explaining that he mak[es] investment decisions[] based upon the full price to the fund when agreeing to buy a bond, and that [w]hat s important is the final price). 3. Negotiations Between Mr. Litvak And The Managers The evidence demonstrated that the negotiations between Mr. Litvak and a manager concerning the ultimate transaction price for a bond were discrete from the analysis by which a counterparty determined its valuation of 8

17 Case , Document 51-1, 11/18/2014, , Page17 of 69 the bond. See, e.g., J.A. 470 (Vlajinac) (stating that the portfolio manager and other analysts conduct research depending on the type of asset, and then they give instructions to the trading desk to execute[,] [a]t that point, I follow the instructions that are given to me ); J.A. 498 (Norris) (explaining that [t]he credit research team performs an analysis to show us what levels we can purchase the bond at ). As the managers testified, they had determined their acceptable range and [their] prices before even negotiating with Mr. Litvak. J.A. 829 (Sarabanchong). After the analysts at the counterparty determined a valuation and conveyed that information to their trading desks, all that was left was to agree on the final price in the range acceptable to both parties i.e., the negotiation. See, e.g., J.A. 481 (Vlajinac) (testifying that misrepresentations did not affect my thinking about the bond itself because [the information] sets the parameters of the negotiations, but did not influence the valuation of the securities ); J.A. 408 (Canter) (stating that he made a decision that [he] should transact with Jefferies because of the price levels and then moved on to negotiating, hopefully, a still better price with Jefferies ). As the managers testified, in each trade they knew the final price and agreed to transact at that price. See, e.g., J.A. 506 (Norris) (testifying that he knew how much [he was] paying and he knew what [he was] getting ). As the managers also testified, they exercised due diligence and determined that 9

18 Case , Document 51-1, 11/18/2014, , Page18 of 69 a transaction at that price was profitable when compared to all the other options available in the market. See, e.g., J.A. 408 (Canter); J.A. 436 (Canter); J.A. 482 (Vlajinac). The managers explained that their decision to transact at the final price was based on a judgment that that s the price that was in the best interest of the fund. J.A. 433 (Canter); see also J.A (Corso) (stating that the final price for the transaction was a perfectly acceptable price for York Capital based upon [its] analytics that day, or else it would have passed ). Despite being the alleged victims of a fraud, the managers repeatedly testified that they would do th[e] trade again at [the same] price. J.A. 436 (Canter); see also J.A. 399 (Canter) (testifying that he never overpaid for a bond, in terms of [his] judgment, about what an appropriate price was ); J.A. 502 (Norris) (stating that, [b]ased on our analytics, buying the bond at the final price was a smart investment decision ). The managers also acknowledged their understanding of the basic negotiating dynamic, under which the traders are typically trying to get you [to] pay more for a bond and so will quote a higher price in the hope of making more profit. J.A. 402, 410 (Canter); see also J.A. 402 (Canter) (testifying that it was okay for the dealer to quote [him] a price that was higher than the price it might be able to buy the bond from that other account ). They testified that it was well known that the information given by the trader, especially information that was volunteer[ed], should be take[n]... 10

19 Case , Document 51-1, 11/18/2014, , Page19 of 69 with a grain of salt. J.A. 508 (Norris); see also J.A. 473 (Vlajinac) (asserting that I m always going to be skeptical ); J.A. 532 (Wollman) (stating that he underst[oo]d in those negotiations that sometimes that kind of information that s volunteered... may not be 100 percent truthful ); J.A. 533 (Wollman) (agreeing that he communicated Mr. Litvak s representation about a bond s trading price to another trader with the comment, believe as much of that as you will ); J.A. 556 (Lemin) (recognizing that skepticism is appropriate because the trader is saying things... that are designed to make you bid higher ); J.A. 837 (Sarabanchong) (noting that misrepresentations in the negotiation would be a normal course of business that did not warrant involving the legal and compliance departments). In fact, the evidence revealed that the counterparties made misrepresentations to Mr. Litvak in the course of the very negotiations at issue. For example, in negotiating to buy a bond, the manager for one of the alleged victim counterparties told Mr. Litvak that a price of $57 or lower was required to obtain his targeted yield of 10%; in negotiating to sell that same bond to someone else just three minutes earlier, the manager told the potential buyer that a price of $58 would result in a 10% yield. J.A. 532, 534 (Wollman). Another manager for a counterparty told Mr. Litvak that he was capped at $42.25 for a bond, when in fact the manager s supervisor had already signed off on a maximum price of $43. J.A (Sarabanchong). A third man- 11

20 Case , Document 51-1, 11/18/2014, , Page20 of 69 ager testified that, in an effort to push up the price, sellers sometimes put out intentionally inaccurate information about other bids and that he had himself engaged in that conduct. J.A. 507 (Norris). 4. The Troubled Asset Relief Program Some of the charged trades involved funds in which the Treasury had invested pursuant to PPIP. In 2008, Congress created TARP to promote stability and liquidity in markets frozen during the financial crisis. J.A. 309 (Miller). PPIP was established under TARP. J.A. 310 (Miller). PPIP was a partnership between the Treasury Department and private investors that allowed the Treasury to invest funds in RMBS while leaving the management of trading to experts, asset managers, who were well established in the field. J.A. 310 (Miller). Under PPIP, investment funds were set up in which the Treasury was a limited partner; the federal government invested or loaned funds to match private investments in each PPIP fund. J.A. 318 (Miller); J.A. 365 (Canter). The Treasury established broad guidelines for PPIP, such as specifying that the types of securities transacted should be formerly triple-a-rated non-agency mortgage-backed securities. J.A. 313 (Miller). The Treasury had the authority to audit the program, primarily to identify conflicts of interest by fund managers. J.A. 314 (Miller). As David Miller, a Treasury official who testified for the government, explained, once the Treasury made an initial investment in a PPIP fund, the 12

21 Case , Document 51-1, 11/18/2014, , Page21 of 69 managers had complete discretion over which eligible assets to buy and sell. J.A. 323 (Miller). Subsequent or downstream transactions were not government acquisitions of the troubled asset ; the government did not own a piece of any individual bond, and all of the cash flow from the securities went directly into the fund. J.A , 323 (Miller). C. The Proceedings At Trial 1. The Parties Theories The government s case-in-chief consisted primarily of online chats showing communications between Mr. Litvak and the counterparty managers; 3 trade tickets showing the price at which Jefferies bought and sold a given bond; the testimony of the managers for some of the charged counts; the testimony of Mr. Miller about PPIP; and the testimony of an agent who investigated the case. See S.A Mr. Litvak did not dispute that he made misstatements. Rather, the primary defenses at trial were that the misstatements were not material and that Mr. Litvak did not contemplate any harm to the counterparties because he believed he was selling the bonds at fully disclosed and agreed upon fair prices and staying below Jefferies 4% profit rule. J.A The defense presented testimony from two Jefferies 3 The managers were Michael Canter of AllianceBernstein; Alan Vlajinac of Wellington; Brian Norris of Invesco; Joel Wollman of QVT Financial; Vladimir Lemin of Magnetar; Katherine Corso of York Capital; and Alvin Sarabanchong of MFA Financial. All of the managers testified as government witnesses except Mr. Sarabanchong, who testified as a defense witness. 13

22 Case , Document 51-1, 11/18/2014, , Page22 of 69 employees; the manager at Jefferies counterparty for the transaction charged in Count 6; and an expert, Mark Menchel. J.A. 681, 770, 821, The Exclusion Of Mr. Litvak s Evidence At a pretrial hearing and in a series of rulings during trial, the district court excluded a broad swath of Mr. Litvak s proposed evidence on relevance grounds. Mr. Litvak sought to present testimony from two experts, Ram Willner and Mr. Menchel. Dr. Willner, a former portfolio manager with extensive industry experience, would have testified about the process of selecting and valuing securities. J.A Specifically, he would have testified that a trader s acquisition cost would be irrelevant to a reasonable investment manager s decisionmaking and that, given market volatility, minor variances in the price of the bonds would not have mattered to sophisticated investors such as the counterparties here. J.A Based on an analysis of comparable bonds, Dr. Willner would also have testified that the transactions at issue were executed at a fair market value; that the bonds at issue were generally priced more favorably than comparable bonds; and that the transactions were overwhelmingly profitable for the counterparty firms. J.A The court excluded Dr. Willner s testimony in its entirety on relevance grounds. See J.A

23 Case , Document 51-1, 11/18/2014, , Page23 of 69 Mr. Menchel, the former general counsel of the Financial Industry Regulatory Authority (FINRA), would have testified about industry practices and terminology. Specifically, he would have testified about the structure of a broker-dealer s compensation on a trade, explaining that these were arm s-length transactions in which the broker-dealer owed no duty to the counterparties and in which the broker-dealer made profits not by charging commissions but by selling the securities at a higher price than it bought them. J.A. 214, , 221. The district court deemed substantial parts of Mr. Menchel s testimony irrelevant, limiting him to testifying about definitions of terms such as principal and agent. J.A. 253, The district court also excluded other evidence that many of the alleged victims profited substantially from the transactions at issue. For example, the court excluded evidence that the trades charged in Counts 1-5 earned returns of 12-16% for the counterparty firms. J.A. 213, 233. The court even required the defense to redact an exhibit showing that, as to the trade charged in Count 10, the manager for the counterparty had actually locked in a profit on the relevant bond before he bought it from Mr. Litvak (by agreeing to sell a portion of the bond to another buyer for a higher price). J.A And the district court excluded a document stating that, in the trade charged in Count 8, the manager sold the bond at issue to Mr. Litvak 15

24 Case , Document 51-1, 11/18/2014, , Page24 of 69 for a full $7.00 above her firm s valuation, which amounted to a 13% profit. J.A Finally, in order to establish Mr. Litvak s good faith, the defense sought to introduce evidence showing that similar negotiation tactics were widely used by traders at Jefferies and that such tactics were approved by supervisors and by Jefferies compliance department. The district court also excluded that evidence, on the ground that conduct that did not directly involve Mr. Litvak was irrelevant. See J.A. 643, Closing Arguments In closing, the government argued to the jury that [t]his case isn t about whether smart professional money managers got great bonds at great prices. J.A It acknowledged that all of [the counterparties] explained to you they did their analytics before they c[a]me to the negotiating table. J.A But it then argued as follows: J.A Everyone agrees when you are buying a bond you want to buy it as cheaply as you can. When you are selling a bond, you want to sell it for the highest price you can. That just makes sense. So, ladies and gentlemen, that s what this case is about. The negotiations to get the best price possible and the lies that Mr. Litvak told to make money in that process. It is not about the analytics, it is about the negotiation. In its rebuttal, the government directly disputed Mr. Litvak s good faith. Taking advantage of the court s exclusion of the evidence that others 16

25 Case , Document 51-1, 11/18/2014, , Page25 of 69 at Jefferies used similar negotiation tactics, the government argued that it is just simply not the case that other people engage in this conduct at Jefferies. The government further argued that, when the jury look[ed] at the evidence or review[ed] it in the jury room, it would show that Mr. Litvak was at the epicenter of the alleged misconduct. Because all the admitted evidence deal[t] with Mr. Litvak, the government asserted that Mr. Litvak was the ringleader of using those tactics. J.A Finally, seizing on the exclusion of expert testimony clarifying the arm s-length nature of the transactions, the government compared Mr. Litvak s conduct to that of a real-estate agent an agent, not a principal, who never takes title to the property who submitted a bid on behalf of his client of $175,000; told his client that the bid was accepted at $200,000; and then pocketed the difference. J.A ; see also J.A The jury convicted Mr. Litvak on all counts. J.A D. Post-Trial Proceedings Mr. Litvak then moved for acquittal under Federal Rule of Criminal Procedure 29, which the district court denied. J.A. 23; S.A. 24. As to all of the counts, the district court held that there was sufficient evidence of materiality because the misstatements could have affected the parties negotiations. S.A The court also held that there was sufficient evidence of fraudulent intent because Mr. Litvak intended to deceive the counterparties, 17

26 Case , Document 51-1, 11/18/2014, , Page26 of 69 regardless of whether Mr. Litvak contemplated harm to them. S.A. 8-10, For the Section 1001 and Section 1031 counts, the court held that there was sufficient evidence of materiality to the Treasury because the misstatements at issue were capable of influencing the private managers of the PPIP funds, regardless of whether they were capable of influencing decisions by the Treasury. S.A , Finally, as to the Section 1001 count, the court held that there was sufficient evidence that the misstatements were on a matter within the jurisdiction of the government because the Treasury had general authority over PPIP. S.A The district court sentenced Mr. Litvak to 24 months of imprisonment, imposed a $1.75 million fine, and denied Mr. Litvak s motion for release pending appeal. S.A. 26; J.A Mr. Litvak timely appealed and renewed his motion for release in this Court. Determining that Mr. Litvak s appeal presented a substantial question of law or fact likely to result in reversal, this Court ordered Mr. Litvak s release pending appeal. Dkt. 42, at 1 (Oct. 3, 2014). 4 4 The government also moved for restitution in the district court. Curiously, shortly after this Court granted Mr. Litvak s motion for release, the government withdrew its motion for restitution, acknowledging that an order in its favor would require an extension of the law for which there is little precedent. D. Ct. Dkt. 290, at 1 (Oct. 8, 2014). 18

27 Case , Document 51-1, 11/18/2014, , Page27 of 69 SUMMARY OF ARGUMENT The government prosecuted Mr. Litvak for conduct that was not a crime. As a matter of law, Mr. Litvak s statements in the course of negotiations were immaterial, and Mr. Litvak did not possess the requisite intent because there was no evidence that he contemplated harm to the counterparties. The district court s deficient jury instructions, and its exclusion of evidence central to Mr. Litvak s defenses of immateriality and good faith, exacerbated the flaws inherent in the government s theory of the case and enabled the jury to reach a verdict that does not comply with the law. This Court should therefore reverse Mr. Litvak s convictions in their entirety or, at a minimum, vacate those convictions and remand for a new trial. I. The government s theory as to why Mr. Litvak s misstatements were material was invalid as a matter of law, and the evidence at trial was therefore insufficient to prove materiality an element of every charged offense. The government argued, and the district court held, that the misstatements were material because, even though the managers testified that the statements did not affect their assessment of the bonds and that they would transact again at the same price, they would have negotiated harder if they had known Jefferies true profit margin. That theory cannot be squared with this Court s prior decisions on materiality, which reject the idea that misstatements about how a price is de- 19

28 Case , Document 51-1, 11/18/2014, , Page28 of 69 rived can be material merely because they affect negotiations. Those decisions, and a long line of common-law decisions from other courts, confirm the proposition that only misrepresentations that bear on the value or quality of the product being transacted are material. To hold otherwise would criminalize all manner of conduct that is commonplace in negotiations. II. The evidence was also insufficient to prove that Mr. Litvak acted with the fraudulent intent necessary for a securities fraud conviction under the relevant provisions. Only a showing of contemplated harm not mere intent to deceive will satisfy the element of fraudulent intent. The government could not prove that Mr. Litvak contemplated harm to the counterparties because Mr. Litvak transacted the very bonds the counterparties sought to transact at exactly the price to which they agreed. For the same reason, the district court erred when it failed to instruct the jury that contemplated harm was a necessary component of fraudulent intent and when it instead instructed the jury that a belief that no one would be harmed was not a defense. As a result of those errors, the district court permitted the jury to convict Mr. Litvak of securities fraud without finding that the government had proven an essential element of the crime. III. Even if the Court were to conclude that the government s evidence was sufficient to show materiality and fraudulent intent, all of Mr. Litvak s convictions would have to be vacated because the district court er- 20

29 Case , Document 51-1, 11/18/2014, , Page29 of 69 roneously excluded much of Mr. Litvak s evidence supporting his defenses of immateriality and good faith. Applying an unduly stringent view of relevance, the district court excluded almost the entirety of Mr. Litvak s expert testimony, along with evidence that the same negotiation tactics were approved by supervisors at Jefferies. That evidence went to the heart of Mr. Litvak s defense. IV. With specific regard to the convictions for TARP fraud and making false statements, the evidence was insufficient and the jury charge was erroneous because the government did not establish that Mr. Litvak s statements had the tendency to influence a Treasury decision, as is required under both statutes. For much the same reason, the government s evidence was also insufficient to prove the separate element of the false-statements statute requiring that the statements be made in a matter within the jurisdiction of the Treasury. V. Finally, the district court s instruction to the jury regarding TARP fraud constructively amended the indictment by adding a right to control theory that was absent from the indictment. The district court thereby impermissibly broadened the bases for conviction on the TARPfraud count. 21

30 Case , Document 51-1, 11/18/2014, , Page30 of 69 STANDARD OF REVIEW This Court reviews the sufficiency of the evidence de novo, determining whether a rational jury could find the essential elements of the crime beyond a reasonable doubt. See United States v. Novak, 443 F.3d 150, 157 (2d Cir. 2006). The Court also reviews de novo a district court s rulings concerning jury instructions, including rulings on claims of constructive amendment. See United States v. Vilar, 729 F.3d 62, 88 (2d Cir. 2013); United States v. Rigas, 490 F.3d 208, (2d Cir. 2007). This Court reviews a district court s evidentiary rulings for an abuse of discretion; under that standard, the Court conducts de novo review of any underlying legal conclusions. See Vilar, 729 F.3d at 82; United States v. Owen, 500 F.3d 83, 87 (2d Cir. 2007). ARGUMENT I. MR. LITVAK S MISSTATEMENTS WERE IMMATERIAL AS A MATTER OF LAW The district court erred in concluding that the evidence was sufficient to prove that Mr. Litvak s misstatements were material, which was an element of every charged offense. In order to establish materiality in this context, the government was required to prove beyond a reasonable doubt a substantial likelihood that a reasonable investor would find the omission or misrepresentation important in making an investment decision. Vilar, 729 F.3d at 89; see also Kungys v. United States, 485 U.S. 759, 770 (1988) (describing a misstatement as material for purposes of Section 1001 where it 22

31 Case , Document 51-1, 11/18/2014, , Page31 of 69 has a natural tendency to influence, or was capable of influencing, the decision of the decisionmaking body to which [the misrepresentation] was addressed (internal quotation marks and citation omitted)). The government argued that Mr. Litvak s misstatements were material because the counterparties would have negotiated harder if they had been aware of Jefferies true profit margin on the transactions even though the managers at the counterparties testified that the misstatements did not affect their assessment of the bonds and that they would buy the same bonds again at the same price. See p. 10, supra. The district court erred in approving that expansive theory of materiality and condoning the use of the federal fraud statutes to police negotiations between sophisticated parties. A. The Misstatements Were Immaterial Under Circuit Precedent In what appears to be the sole case in which this Court has addressed the materiality of misrepresentations relevant only to negotiations, the Court held such misrepresentations immaterial as a matter of law. In Feinman v. Dean Witter Reynolds, Inc., 84 F.3d 539 (2d Cir. 1996), the plaintiffs alleged that brokerage firms charged transaction fees that they represented as costs, but that far exceed[ed] the cost to the firms of such items and instead represent[ed] hidden, fixed commissions. Id. at 540. By disguising those commissions, the plaintiffs alleged, the brokerage firms prevent[ed] customers from negotiating the fees. Id. 23

32 Case , Document 51-1, 11/18/2014, , Page32 of 69 This Court held that the brokerage firms misrepresentations were immaterial. The Court explained that [c]ases in which we have refused to find that representations were not material as a matter of law have involved misstatements or omissions that did, or at least had the potential to, cause the plaintiff financial harm by affecting the value of the security. 84 F.3d at 541. Because the misrepresented amount of pure profit did not fall within that category, the Court rejected the plaintiffs theory. In Feinman, therefore, this Court rejected the argument, advanced by the government and accepted by the district court here, that misstatements about how the final price was derived could be material merely because they affected [the counterparties ] negotiations. D. Ct. Dkt. 246, at 4 (May 12, 2014). Instead, as the Court cautioned, [i]f brokerage firms are slightly inflating the cost of their transaction fees, the remedy is competition among the firms in the labeling and pricing of their services, not resort to the securities fraud provisions. Feinman, 84 F.3d at 541; see also Appert v. Morgan Stanley Dean Witter, Inc., 673 F.3d 609, 613 (7th Cir. 2012) (citing Feinman in holding that any alleged misrepresentation... that the stated [fee] was tied to actual costs was not material to investors decisions to buy or sell securities as a matter of law). Moreover, this Court has repeatedly recognized the fundamental principle that, to be material, a fact must be capable of affecting the value of the 24

33 Case , Document 51-1, 11/18/2014, , Page33 of 69 security being transacted. For example, this Court has considered and approved a jury instruction defining materiality in terms of the potential effect [on] the value of the security. Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 888 (2d Cir. 1972); accord SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968). Where a misstatement is unrelated to value, this Court has deemed it immaterial even when disclosure of the fact would have precluded the transaction. See Barnett v. Kirshner, 527 F.2d 781, 785 (2d Cir. 1975) (holding a misrepresentation immaterial where it obscured the involvement of an individual the seller disliked and to whom he would not sell, because the purchaser s identity was not a fact that would enhance materially the value of the stock ). Because Mr. Litvak s misstatements did not affect the value of the securities, they were immaterial as a matter of law. B. The Misstatements Would Also Be Immaterial Under The Common Law This Court s decisions on materiality are consistent with a long line of decisions at common law defining material misrepresentations as those that affect[] and go[] to [the transaction s] very essence and substance. 1 William Williamson Kerr, A Treatise on the Law of Fraud and Mistake 34 (2d ed. 1883) (Kerr). Under the common law, [m]isrepresentations which are of such a nature as, if true, to add substantially to the value of property, or are calculated to increase substantially its apparent value, are material. Id. at 35. By contrast, [i]t is not enough that [the misrepresentation] may have 25

34 Case , Document 51-1, 11/18/2014, , Page34 of 69 remotely or indirectly contributed to the transaction or may have supplied a motive to the other party to enter into it. Id. Instead, a misrepresentation must be the very ground on which the transaction has taken place. Id. Consistent with the foregoing description, courts assessing materiality in the context of common-law fraud claims have consistently deemed misstatements of the type at issue here to be immaterial as a matter of law. For instance, a misrepresentation to an experienced real estate man who had dealt in stocks that the seller of the stock was making a commission of 75 per share was held to be pure dealer s talk that was immaterial because the identical thing promised [was] delivered, at the price agreed, and the parties [were] dealing at arm s length. Steiner v. Hughes, 44 P.2d 857, 860 (Okla. 1935) (per curiam). Similarly, false representations that a bid was as low as the work could be done and that there was no profit in it at that price were deemed dealer s talk that would not invalidate a contract on a theory of fraud in the inducement. Worrell & Williams v. Kinnear Manufacturing Co., 49 S.E. 988, (Va. 1905); see also Byrd v. Rautman, 36 A. 1099, 1101 (Md. 1897) (holding that a false statement that the defendant owed a certain amount in commission out of the sum received, and so could only make the deal at a more favorable price, was immaterial on the ground that nothing in the statement, if untrue,... was calculated to deceive the [plaintiff] as to 26

35 Case , Document 51-1, 11/18/2014, , Page35 of 69 the real value of his interest in the stock ); McCaw v. O Malley, 249 S.W. 41, 45 (Mo. 1923) (stating that it is fundamental that the mere statement by the vendor of what an article cost him would not be regarded as a matter on which a vendee should rely where, as here, the vendee had an unrestricted opportunity to learn the actual value of the property, and where, as here, he actually undertook to ascertain such value ). Indeed, at common law, courts expressly deemed immaterial facts that would affect a counterparty s decision to negotiate harder by shedding light on an opponent s willingness to accept a less favorable price, rather than on the value of the item at issue. See Ripy v. Cronan, 115 S.W. 791, (Ky. 1909) (holding that a lie about the lowest price a defendant would accept was immaterial because otherwise [t]he validity of [plaintiff s] purchase would depend, not upon what he was willing to pay, but upon the price at which the property might be purchased ). A leading English decision involved a buyer s false statement that his partners would not consent to pay more than a certain sum for the seller s property. See Vernon v. Keys, 104 Eng. Rep. 246, 248 (K.B. 1810). The court explained that a seller is unquestionably liable to an action of deceit, if he fraudulently misrepresent the quality of the thing sold to be other than it is in some particulars. Id. at 249. But the court could find no case, or recognized principle of law that would impose liability for misrepresenting the seller s chance of sale, or the proba- 27

36 Case , Document 51-1, 11/18/2014, , Page36 of 69 bility of his getting a better price for his commodity, than the price which such proposed buyer offers. Id. (emphasis added); see also Kerr 37 (citing Vernon for the principle that a lie about the reason for the limited amount of [a buyer s] offer is immaterial). C. The Government s Theory Of Liability Would Dramatically Expand Criminal Liability For Statements Made In The Course Of Negotiations Accepting the government s theory of materiality not only would constitute a sharp departure from the decisions of this Court and others; it would raise the specter of criminal liability for commonplace conduct in negotiations. Mr. Litvak s misstatements about Jefferies profit margin at a given price point obscured nothing about the bonds at issue; instead, they misled the counterparties only about Jefferies true reservation price for the transactions. But [t]o conceal one s true position, to mislead an opponent about one s true settling point, is the essence of negotiation. James J. White, Machiavelli and the Bar: Ethical Limitations on Lying in Negotiation, 1980 Am. B. Found. Res. J. 926, 928 (1980) (White); see also Robert H. Frank, Passions Within Reason 165 (1988) (noting that [t]he art of bargaining... is in large part the art of sending misleading messages about [reservation prices] ). As one commentator has put it, a careful examination of the behavior of even the most forthright, honest, and trustworthy negotiators 28