* U.S. prosecutors rest their case, defense begins
* Ex-Jefferies trader accused of defrauding U.S., clients
NEW HAVEN, Conn., Feb 26 (Reuters) - A former supervisor of onetime Jefferies Group Inc trader Jesse Litvak, who is on trial on federal fraud charges, testified on Wednesday that traders sometimes used coded language to conceal trades whose prices were not necessarily best for clients.
The testimony by Johan Eveland, a Jefferies managing director, opened the defense's case in the closely watched trial in which prosecutors accuse Litvak of defrauding customers in a more than $2 million scheme involving mortgage-backed securities trades.
Litvak's lawyers have argued that it was common in bond trading for clients to be misled about prices, and that their client's activities were not crimes.
Prosecutors rested their case earlier Wednesday in the U.S. District Court in New Haven, Connecticut, after about six days of testimony. Litvak's lawyer, Patrick Smith, said the defense may need three days. It was unclear whether Litvak will testify.
Litvak, 39, faces 15 criminal counts in the first case brought under a 2009 law banning major fraud against the United States through the $700 billion federal bailout known as the Troubled Asset Relief Program, or TARP.
Eveland was a longtime friend and colleague of Litvak who was among his supervisors from 2008 until December 2011, when Jefferies fired Litvak.
Smith tried to establish on Wednesday that Eveland and other supervisors knew about Litvak's trading practices, but failed to reprimand him because the practices were accepted at Jefferies and in the industry. He asked whether "white lies, small lies" might also be considered acceptable.
Eveland said repeatedly that it was against company policy for traders to lie and misrepresent prices on bond trades.
But he conceded to Smith that some traders used the phrase "to keep in touch with" when trying to increase profit they could make from misleading customers, in a way that Litvak's lawyers maintain was not illegal.
"I am familiar with that phrase, but I don't believe it was typical," Eveland said. "But from time to time I am aware that traders used the phrase."
Eveland nonetheless added: "It is not our intent to misrepresent or lie to a client. It is against company policy and we don't do business that way."
Prosecutors previously offered evidence of charts that they said showed how Litvak made nearly $400,000 in extra profit on one deal alone, more than $71,000 on another trade and $44,500 on a third trade by lying to and misleading clients.
U.S. Special Agent James O'Connor testified on Tuesday that the charts reflected the "actual profit difference" that Litvak was realizing by misleading clients.
Smith asked Eveland whether he recalled having told federal prosecutors that Litvak had lied to AllianceBernstein Holding LP , the big asset manager and a former client, as the government contends.
"No, I indicated that AllianceBernstein believed they were misled and was very upset with us," Eveland responded.
Eveland began testifying after the defense, outside the jury's presence, formally asked Chief Judge Janet Hall to dismiss the case because jurors would be unable to conclude based on the government's case that a crime was committed. Hall did not rule immediately on the request.
Litvak was arrested in January 2013 and faces criminal charges on 10 counts of securities fraud, four counts of making false statements and one count of fraud connected to TARP.
The defendant pleaded not guilty and faces up to 20 years in prison on each securities fraud count if convicted. He also faces a U.S. Securities and Exchange Commission civil lawsuit.
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.