Jesse Litvak is a former Jefferies bond trader who lied to his customers. Specifically, he traded residential mortgage-backed securities, and he would tell buyers of those securities inventive little stories about the prices he had paid for them. So for instance, a customer came to him and asked to buy some bonds, he described for the customer "a fictional back‐and‐forth between himself and an unnamed, non‐existent third‐party seller," and he ended by telling the customer that he'd paid $53.00 for the bonds. Then he charged the customer $53.25. The customer thought that Litvak had worked hard on his behalf and gotten paid a quarter for his efforts. But really Litvak had owned the bonds all along -- he'd bought them days earlier for $51.25 -- and made an undisclosed profit of $2.00.

The question is: Is this a crime? It might seem like lying to your customers would always be a crime, but that is not true at all. Lying to your customers is only a crime if it is fraud, and it is only fraud if the lies that you tell them are "material," and the lies are only materialif there is "a substantial likelihood that a reasonable investor would find" them "important in making an investment decision." Lying to your customers about whether an investment is a Ponzi scheme is fraud. Lying to your customers about what color socks you are wearing probably isn't.

But lying to your investors about the price you paid for bonds is genuinely interesting. Is it fraud? It sounds like fraud. But when Litvak was arrested and charged with securities fraud in 2013, his defense was that his lies were not material, because no reasonable investor would care about them in making an investment decision. There are two main arguments for that:

David Fuller's view

I think this case is straight forward.  The broker should be doing all he can to help his clients.  If he does, he will be happier, have a clear conscious and probably make more money himself over the long term. 

However, if he becomes a predator, ripping his clients off on a small basis, it will only be a matter of time before the dishonest broker increases the scale of his scam.  Additionally, the dishonest broker will not develop his analytical ability in the markets, because he has less need to do so. 

“Oh, what a tangled web we weave, when first we practice to deceive.”

Sir Walter Scott, Marmion, Canto vi Stanza 17