(Bloomberg) -- A U.S. government crackdown on bond traders using questionable tactics resurfaced in a Connecticut courtroom at the trial of a former Cantor Fitzgerald LP managing director who is charged with lying to his customers.
David Demos is one of more than a half-dozen traders who were charged with deceiving clients, in this case about the prices 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 as those 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."
Liam Brennan, a former assistant U.S. attorney in Connecticut who worked on the Nomura case, said the prosecution of Demos shows that the government is committed to "following through with difficult cases involving powerful defendants with powerful attorneys."
"Litvak wasn’t just a flash in the pan from the trader’s point of view or from the department’s interest point of view," Brennan said.
The first day of the trial featured testimony from Ed Cong, a principal at one of the alleged victims, Marathon Asset Management. He answered questions about trades he made with Demos in 2011 and 2012.
Prosecutors say Demos misled Marathon in multiple transactions, including one when Cantor bought a bond from another bank and lied about the acquisition price, allegedly increasing the amount his firm would make by more than $50,000. Cong said he was unaware that Demos had deceived him until he met with prosecutors.
“We would have not actively sought out his advice and services on bonds,” Cong said. “We probably would have gone with another broker-dealer.”
Cong is scheduled to return to the stand when the trial resumes Wednesday.
The case is U.S. v. Demos, 16-cr-00220, U.S. District Court, District of Connecticut (New Haven).
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