In July 2014, Jesse Litvak, the former managing director of investment bank Jefferies LLC, became the only person to date to be convicted of fraud in connection with the U.S. government’s Troubled Asset Relief Program (TARP), which used bailout funds to promote investment in mortgage-backed securities. Litvak was charged with defrauding investors of $2 million by misrepresenting how much sellers were asking for the securities and what customers would pay for them. After driving up the price, he would keep the difference for his firm, reports Bloomberg News.
Assistant U.S. attorney Jonathan Francis argued in court that Litvak’s behavior was predatory and put him in “an elite class of fraudster.” The judge in the case agreed, sentencing Litvak to two years in prison.
Litvak and his attorney, Patrick Smith, insist that his misrepresentations were very different from the types of lies told in more typical fraud cases involving Ponzi schemes and other scams. In an appeal of his sentence, they’ve argued that Litvak’s misleading statements to bond buyers were not “material” to their decisions. Rather, his statements were typical sales tactics used in bond negotiations, they say. Moreover, they argue, Litvak’s clients were sophisticated investors who “paid a price they were willing to pay for precisely the securities they expected to, and did, receive.” In other words, Litvak’s puffery regarding how others valued the bonds didn’t prevent his buyers from getting the exact deal they were promised.
A U.S. appeals court agreed to hear Litvak’s case and delay his imprisonment while the appeal is pending. If the court overturns his conviction, a clear legal distinction would be set between misrepresentations that are typical negotiation posturing versus those that are part of a scheme to defraud, writes Wayne State University Law School professor Peter J. Henning in the New York Times.
Are you over the line?
The Litvak case raises a broader question: To what extent, if at all, can negotiators be untruthful without getting into legal hot water? Most of us aspire to be completely honest in our negotiations, yet we all know of people who distort facts to try to induce agreement, and there may be times when we are tempted to do so ourselves.
Take the story of a couple that is thinking about making a bid on a house, as related by Harvard Law School and Harvard Business School professor Guhan Subramanian in his book Dealmaking: The New Strategy of Negotiauctions (W. W. Norton, 2011). The seller’s agent informs them that another bid has come in at the full asking price.
The couple decide to bid $10,000 above the asking price, about $20,000 more than they would have bid if they didn’t believe there was another offer. The next day, the couple learns that the seller’s agent was bluffing—there was no other offer.
In this case, the buyers likely would be able to get out of the deal or successfully sue the broker for fraud, writes Subramanian, as long as they were able to prove their claim that the broker had lied to them. Notably, this can be difficult to do. Suppose the broker testifies that she claimed not that someone had made a concrete offer on the house but rather that someone had been thinking about making one. In the United States, the courts usually excuse this sort of puffery as typical seller’s talk. (Many European countries, by contrast, might view it as illegal.)
The legal line between acceptable and unacceptable misrepresentation is bound to shift slightly over time. In your own negotiations, your moral compass should be more steadfast. Remember that outright deception is a risky move, and let your conscience be your guide.