A U.S. government crackdown on bond traders using questionable tactics resurfaced in a Connecticut courtroom as a trial began in the case of a former Cantor Fitzgerald LP managing director charged with lying to his customers during negotiations.
David Demos is one of more than a half-dozen traders who were criminally charged with deceiving clients about the prices at which his firm could pay for mortgage-backed securities, or how much it could sell them for, in order to increase commissions to boost his pay.
The accusations against Demos are the same in cases against former traders at Nomura Holdings Inc. and and Jefferies Group LLC — cases that ended in split decisions for prosecutors. Assistant U.S. Attorney Jonathan Francis told jurors during opening statements on Monday that Demos was able to see both sides of a negotiation. He took advantage of that position in order to increase the money he and his firm made, Francis said.
"He lied to his customers to steal their money," Francis said. "By lying he made more profit for Cantor. And by making more profit for Cantor, the defendant made more money for himself."
Demos’s attorney, Jose Baez, previewed a defense strongly resembling that of the other traders charged in the crackdown — that his misstatements weren’t "material," or important enough to his customers, that it would influence their investment decisions.
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In his opening statement, Baez called the alleged victims in the case "profiteers" who made millions of dollars, lost no money and are still happy with the trades. He said they are sophisticated investors who use complex models to determine when to buy and sell securities and don’t rely on traders to make their decisions.
The Demos trial, which is under way in Hartford, will serve as an important test of the government’s efforts to tame dubious trading practices in the bond market, which began with the arrest of former Jefferies managing director Jesse Litvak in January 2013. Litvak was convicted last year and is serving a two-year sentence.
Baez said Demos would have had to be a "fortune teller" to know that what he was doing was illegal, since the last trade where he is accused of defrauding a customer came three weeks before Litvak was charged. The government "destroyed David Demos’s life" over what was essentially sales haggling, Baez said.
The case shows prosecutors are trying to send a message that they’re still watching the market more than five years after Litvak was charged, said Peter Henning, a law professor at Wayne State University in Detroit. While the Securities and Exchange Commission does a good job regulating stocks and ordinary bonds, the products at issue in the Demos case involve much more sophisticated players, he said.
"The government wants to send a message that we’re watching this one too," Henning said. "These aren’t mom and pop investors, but that doesn’t mean there wasn’t fraud."
The case is U.S. v. Demos, 16-cr-00220, U.S. District Court, District of Connecticut (New Haven).
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