NEW HAVEN, Conn., Jan 10 (Reuters) - A former Jefferies Group Inc managing director accused of cheating clients and the government on mortgage securities after the 2008 financial crisis failed to persuade a federal judge to keep jurors from being told that "taxpayers" were victims of his alleged fraud.
At a four-hour hearing on Friday, Chief Judge Janet Hall of the U.S. District Court in Connecticut rejected an argument by lawyers for Jesse Litvak that prosecutors should instead refer to "the government" or "the U.S. Treasury" as alleged victims.
With Litvak looking on, John Hillebrecht, one of his lawyers, argued that his client might be unfairly prejudiced "if a juror thinks, 'This person is stealing my money."'
Hall recognized the potential problem, asking federal prosecutor Jonathan Francis whether the word "taxpayer" would make jurors "feel they are personally invested in the case." For now, she said she would allow the word but could decide later to restrict its use if she felt that was necessary.
Prosecutors have accused Litvak of cheating customers on residential mortgage-backed securities (RMBS) trades, hoping to boost Jefferies' revenue and his own pay.
The government was also an alleged victim because some of the bond buyers had taken part in the Public-Private Investment Program, a component of the $700 billion federal bailout known as the Troubled Asset Relief Program. PPIP was intended to help rebuild a market for troubled mortgage debt.
Unveiled last Jan. 28, Litvak's case was the first brought under a 2009 law banning "major fraud" against the United States through TARP.
The case took on added importance this week as the government said it was probing fraud in the trading of residential mortgage-backed securities, including in transactions stemming from the bailout.
The Wall Street Journal, citing unnamed sources, said the Department of Justice, Securities and Exchange Commission and TARP special inspector general are probing whether eight or more banks cheated mortgage bond clients after the 2008 crisis.
At Friday's hearing, Hall also ruled that Litvak's lawyers should not tell jurors that some 2,700 other transactions he conducted while at Jefferies were proper.
Hall said such a claim would be impossible to verify and is not germane to the 11 transactions discussed in the indictment.
"The fact that I drive 55 miles per hour, 364 days a year on the Merritt Parkway doesn't mean I'm not driving 80 miles per hour on the last day of the year," thereby breaking the law, she said.
Hall also said prosecutors could try to introduce a small number of other transactions to show Litvak had a financial motive to defraud, if his pay were dependent on his activity.
Litvak has pleaded not guilty to 11 counts of securities fraud, one count of TARP fraud, and four counts of making false statements.
Jury selection has been set for Feb 3. A trial would begin on Feb. 18, and could last about four calendar weeks, including breaks.
REVENUE, PAY BOOST
Prosecutors have said Litvak generated more than $2.7 million of revenue for Jefferies on the bond sales.
The customers include funds at AllianceBernstein Holding LP , BlackRock Inc, Soros Fund Management LLC, Daniel Loeb's Third Point LLC and Wellington Management Co.
Litvak lied about the prices he paid and invented an imaginary seller of bonds that Jefferies already held, allowing him to charge commissions he did not earn, according to prosecutors.
He did so to help offset his poor trading, including a more than $10 million loss in 2011, which was a factor in his compensation, prosecutors have said.
Litvak has said the markups charged on his bonds were within industry norms, and that his alleged victims were "sophisticated" enough to decide whether the prices were fair.
In a court filing on Thursday, prosecutors accused Litvak of violating a confidentiality agreement by making grand jury transcripts public.
The government said similar improper disclosures could shed light on "the scope and direction" of its unfinished fraud probe, and asked Hall to order that Litvak halt such conduct, which Hall granted.
Jefferies is now part of Leucadia National Corp. Neither company was charged.
Litvak, who was fired in December 2011, faces up to 20 years in prison on each count if convicted. The U.S. Securities and Exchange Commission has filed related civil charges.
The cases are U.S. v. Litvak, U.S. District Court, District of Connecticut, No. 13-cr-00019; and SEC v. Litvak in the same court, No. 13-00132.