Updated, 2:48 p.m. | A federal appeals court has determined that Jesse C. Litvak, a former senior trader at the Jefferies Group, can stay out of prison while he appeals a conviction of defrauding investors in mortgage-backed securities.
The United States Court of Appeals for the Second Circuit said in an order on Friday that Mr. Litvak could be released because he had raised questions about the conviction serious enough to suggest it was “likely” to be overturned.
Mr. Litvak was found guilty in March of deceiving customers about the prices of mortgage-backed securities he sold to them after the financial crisis. Giving the case unusual significance was the fact that prosecutors claimed that the United States government was a victim, because some of Mr. Litvak’s clients were managing money that was part of the Treasury Department’s Troubled Asset Relief Program, or TARP.
A federal jury in New Haven, Conn., convicted Mr. Litvak on 15 criminal counts, including 10 of securities fraud, making him the only person convicted of fraud related to the TARP program involving investments in mortgage-backed securities. He was sentenced in July to two years in prison. His lawyers vowed to appeal the conviction.
The order on Friday, though just one paragraph long, was an incremental victory for Mr. Litvak. Quoting a 1984 law, the court said Mr. Litvak had raised “a substantial question of law or fact likely to result in” a reversal.
Thomas Carson, a spokesman for the United States attorney in Connecticut, declined to comment.
A lawyer for Mr. Litvak, Kannon K. Shanmugam, said in a statement: “We’re pleased with today’s ruling and look forward to presenting our arguments on appeal.”
The case showed the aggressive prosecutorial stance of the special inspector general for TARP, Christy L. Romero. Disputes about overcharging brokerage clients for securities typically play out through civil lawsuits; a federal prosecution as in the Litvak case is extremely rare.
Prosecutors claimed that, from 2009 to 2011, Mr. Litvak generated more than $2 million in revenue for Jefferies by fraudulently overcharging customers that included some of the world’s largest investors, like AllianceBernstein, Soros Fund Management, Magnetar Capital and BlackRock. Some of the clients, prosecutors said, were among the firms tapped by the Treasury to invest in toxic mortgage-backed securities as part of the TARP bailout.
Mr. Litvak’s lawyers argued that the clients were sophisticated investors who had done their own analyses of the securities. In a bail motion, Mr. Shanmugam conceded that in certain trades Mr. Litvak had misrepresented the profit Jefferies would make on a sale, by telling clients he had bought a security for a higher price than he actually had. But Mr. Shanmugam argued that Mr. Litvak never misrepresented the nature or quality of the securities themselves.
Mr. Shanmugam took issue with aspects of Mr. Litvak’s trial. He argued that the judge erred in instructing the jury on a point of law regarding a defendant’s intent to defraud victims. He also claimed that the judge improperly excluded testimony that might have shown Mr. Litvak acted in good faith and that his tactics were in “widespread use” at Jefferies.
A week after Mr. Litvak was convicted in March, Jefferies agreed to pay $25 million to settle accusations by the Securities and Exchange Commission that it failed to supervise Mr. Litvak and other traders.
Mr. Litvak had been scheduled to report to prison in November. The opening written brief on his appeal is due Nov. 18.