The government’s five-year push to see former Jefferies managing director and mortgage-backed securities trader Jesse Litvak jailed for mortgage bond fraud is about to fail again, as the Court of Appeals has again sided with Litvak, overturning a lower court’s conviction and ordering Litvak released from jail.

Litvak was originally charged in 2013 with 16 counts of defrauding customers on residential mortgage-backed securities trades by allegedly misrepresenting both the selling price and buying price of mortgage bonds.

In his role as a broker-dealer, Litvak dealt with both the bond sellers and bond buyers. In some cases, Jefferies would purchase the bond for a certain price, then turn around and sell it for more, thereby, obliviously making a profit.

The government claimed that Litvak was not honest with parties on both sides and worked to generate more profits than Jefferies was entitled to.

In March 2014, Litvak was found guilty of lying to clients about mortgage-backed securities and received a two-year prison sentence for 10 counts of securities fraud, one count of defrauding TARP, and four counts of making false statements within the jurisdiction of the United States government.

Litvak successfully fought that sentence, with the Court of Appeals for the Second Circuit tossing his conviction because he wasn’t allowed to bring expert witnesses to testify on his behalf.

But the government didn’t give up in its pursuit of Litvak, bringing 10 new charges against Litvak and eventually securing a guilty verdict on just one count of fraud.

Last year, Litvak was sentenced to two years in jail for that one count and sent to jail, but Litvak appealed that decision, and for the second time, the Court of Appeals has overturned his conviction.

The 2nd Circuit Court of Appeals ruled Thursday that the government and the lower court erred in the prosecution of Litvak, reversed his conviction and granted him a release from prison.

Litvak appealed his conviction on two fronts. First, Litvak claimed that his “misstatements” could not be held against him because the buyer in question had a responsibility to do its due diligence about the RMBS transaction.

But, the Court of Appeals held that those statements were indeed “material” to the case and did not grant the appeal on those grounds.

Where Litvak was successful was on the second part of his appeal.

At issue is whether Litvak was acting as an agent on the buyer’s behalf. The buyer, Brian Norris of Invesco, believed that Litvak was acting on Invesco’s behalf and testified as much.

But, the appeals court ruled that the lower court “materially erred” in allowing Norris’ testimony to be admitted into evidence because Litvak was only acting as an agent of Jeffries.

From the Court of Appeals ruling:

(T)he district court erred in admitting evidence that the individual representing the counterparty in the transaction for which appellant was convicted believed appellant to be an agent acting on the counterparty’s behalf. All parties agree that the belief in an agency relationship was erroneous and that appellant acted solely as a principal in the transaction underlying this appeal. Indeed, the testimony of the counterparty’s representative indicated that the counterparty, his employer, had informed him that no agency relationship existed but that the representative disagreed. The district court instructed the jury that no agency relationship existed.

According to the court, the counterparty’s belief (Invesco in this case) that Litvak was acting as its agent as well is the only difference between this one count and the other charges against Litvak.

Again from the court ruling:

Appellant argues that the district court erred by admitting Norris’s testimony that appellant was Invesco’s agent, and that this evidence may have tipped the balance in favor of the jury’s conviction on that count. We agree.

It is now undisputed that appellant never acted as Invesco’s or Norris’s agent during the trade in question. Appellant acted as a principal: Jefferies bought the bond from one party, held it for a brief period of time, and then sold it to Invesco. The transaction was at arms-length, and appellant owed no fiduciary duties to the buyer. As the owner of the bond, Jefferies did not have to convey the bond to Invesco and assumed the risk that Invesco would walk away from the deal after Jefferies had bought the bond.

Accordingly, we vacate and remand the judgment of conviction.

And because Litvak is currently in jail, the court ordered that he be released on appropriate bond, pending further proceedings.

To read the court's decision in full, click here.