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UPDATE 1-Ex-Jefferies trader guilty of fraud in bond probe

NEW HAVEN, Conn., March 7 (Reuters) - A federal jury found former Jefferies Group Inc trader Jesse Litvak guilty of defrauding clients on mortgage bond trades, a victory for the government as it probes whether banks cheated their customers in the years after the financial crisis.

Litvak, 39, was found guilty on Friday on all 15 counts he faced, following 1-1/2 days of deliberations by jurors in the federal court in New Haven, Connecticut. The trial began on Feb. 18.

Prosecutors accused Litvak of cheating clients out of more than $2 million by inflating bond prices, lying about how much Jefferies paid for them, and even inventing imaginary sellers. They said he did this to boost Jefferies' profit and his pay.

"We're gratified the jury returned the verdict it did," Assistant U.S. Attorney Eric Glover told reporters outside the courtroom of Chief Judge Janet Hall, who oversaw the trial. "Justice was served."

Litvak rubbed and shook his head as the verdict was read, turning to look at his parents and crying wife in the spectator section.

His lawyer Patrick Smith said an appeal is planned.

"Mr. Litvak is obviously very disappointed in the verdict," Smith said. "The court made several serious errors that undermined Mr. Litvak's ability to present his full defense."

Jurors found Litvak guilty on 10 counts of securities fraud, four counts of making false statements and one count of fraud connected to the 2008 federal bailout known as the Troubled Asset Relief Program, or TARP.

Litvak faces up to 20 years in prison on each securities fraud count. He remains free on bail, and his sentencing was scheduled for May 30.

Jefferies is now part of Leucadia National Corp. Neither company was charged. The case was unveiled in January 2013.

ACTIVE PROBE

While much recent litigation against banks has focused on pre-crisis conduct, Litvak's prosecution was the first under a law banning major fraud against the United States through TARP.

Prosecutors said the United States was victimized because some of Litvak's clients, such as the large asset manager AllianceBernstein Holding LP, participated in a TARP program designed to spur demand for troubled mortgage debt.

The government disclosed in January that it is probing fraud in the trading of residential mortgage-backed securities, including in transactions stemming from the bailout.

"The investigation is continuing, ongoing and active," Glover said on Friday.

Prosecutors said Litvak's criminal activity at Jefferies took place from 2009 to 2011. Jefferies fired him in December 2011.

In their defense, Litvak's lawyers argued that his clients were "sophisticated" investors who were capable of analyzing whether the bond prices they were paying were fair.

The lawyers also said Litvak's activity was common in the bond industry, and thus not considered criminal, and that Jefferies condoned similar conduct by others, objecting to Litvak only when faced with the possible loss of a big client.

Litvak did not take the witness stand in his defense. He also faces a U.S. Securities and Exchange Commission 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.